U.S. SECURITIES AND EXCHANGE COMMISSION
                           Washington, DC 20549

                               FORM 10-KSB
(Mark One)
      [X]  Annual report under Section 13 or 15(d) of the Securities
           Exchange Act of 1934
               For the fiscal year ended October 31, 2006
      [ ]  Transition report pursuant to Section 13 or 15(d) of the Securities
           Exchange Act of 1934
               For the transition period from ________ to ________
      Commission files number            0-20303
                              --------------------------

                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
         ---------------------------------------------------------
               (Name of small business issuer in its charter)

           Delaware                                      13-2846796
    ------------------------------------------------------------------------
 (State or other jurisdiction of                      (I.R.S. Employer
  incorporation or organization)                     Identification No.)



 4 Hardscrabble Heights, P.O. Box 382, Brewster, NY          10509
----------------------------------------------------------------------------
(Address of principal executive offices)                   (Zip Code)

                              (845) 277-8100
                   -------------------------------------
                       (Issuer's telephone number)

Securities registered under Section 12(b) of the Exchange Act:  None.
                                                                ----
Securities registered under Section 12(g) of the Exchange Act:

                           Title of Each Class
                       ---------------------------

                      Common Stock, $.0001 par value
                  --------------------------------------

      Check whether the issuer is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. [ ]


     Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes     X     	No
    --------    -----------

     Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]

      Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).  Yes         No    X
                                                -------    ---------

     State issuer's revenues for its most recent fiscal year:  $23,686,213
for the fiscal year ended October 31, 2006.

     State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which
the common equity was sold, or the average bid and asked price of such
common equity, as of a specified date within the past 60 days:  $12,398,521
as of February 28, 2007.  The aggregate market value was based upon the
closing price for the Common Stock, par value $.0001 per share, as quoted
by the NASDAQ for such date.

  (ISSUERS INVOLVED IN BANKRUPTCY PROCEEDING DURING THE PAST FIVE YEARS)

Check whether the issuer has filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court.
Yes           	No
   ---------    ----------

               (APPLICABLE ONLY TO CORPORATE REGISTRANTS)

     State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:  As of February 28,
2007, 3,011,561 shares of Common Stock, par value $.0001 per share.

                  DOCUMENTS INCORPORATED BY REFERENCE

     If the following documents are incorporated by reference, briefly
describe them and identify the part of the Form 10-KSB (e.g., Part I, Part
II, etc.) into which the document is incorporated:  (1) any annual report
to security holders; (2) any proxy or information statement; and (3) any
prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of
1933 ("Securities Act").  None.
                          ----

     Transitional Small Business Disclosure Format (check one):
Yes               No     X
   -----------       ---------

<PAGE>

                               PART I

ITEM 1. DESCRIPTION OF BUSINESS

OVERVIEW

        Touchstone Applied Science Associates, Inc. (the "Company" or
"TASA") competes exclusively in the assessment marketplace.  With
the advent of No Child Left Behind legislation ("NCLB"), the
Company's Board of Directors and management made the strategic
decision to focus the organization on the fast-growing assessment
segment of the K-12 education market. The Company competes in both
the custom and proprietary product lines of the assessment
marketplace.  Over the past decade, this market has been moving
towards custom testing as a result of NCLB legislation requiring
that student success be measured against specific standards
established by each individual state.  The Company has recognized
this trend and has aligned its long term and short term strategic
initiatives and resources to take advantage of these changes in the
market.  During the fiscal year ended October 31, 2006 ("Fiscal
2006"), the Company decided to minimize its efforts in growing its
proprietary products business, and to devote significant resources
to expanding its custom testing services. The Company implemented
this strategy by acquiring all the outstanding stock of Questar
Educational Systems, Inc. ("Questar") in May 2006.  Questar
provides test delivery, scoring, and score analysis capabilities
for state testing programs.  In addition to the Questar
acquisition, the Company had previously acquired all the
outstanding stock of both Assessment and Evaluation Concepts, Inc.
("AEC") and Achievement Data, Inc. ("ADI") in January 2005 and July
2005, respectively.

        As a result of the Company's recent acquisitions and change in
strategic initiatives, and because of the industry shift from
proprietary to custom work, the Company believes that the
descriptions of its revenues as either custom or proprietary are no
longer representative of the Company's business. Consequently, the
Company is combining categories in the reporting of its assessment
revenues. In order to report clearly the growth of our business for
prior versus current periods, we will be reporting revenues with
Questar and without Questar since that acquisition has a
significant impact on the overall revenues of the Company during
the current reporting period.

        Revenues were $11.7 million for the fiscal year ended October
31, 2005 ("Fiscal 2005") and $23.7 million for Fiscal 2006.  Fiscal
2006 revenues without Questar were $13.8 million.

        TASA's corporate headquarters are located at 4 Hardscrabble
Heights, P.O. Box 382, Brewster, New York 10509.  The Company's
telephone number is (845) 277-8100 and its facsimile number is
(845) 277-3548.  The Company maintains a website at www.tasa.com.
Information contained on the Company's website is not, and should
not be deemed to be, incorporated into this Report.  As used in
this Report, the terms "Company" and "TASA" refer to Touchstone
Applied Science Associates, Inc. and its subsidiaries, unless the
context otherwise indicates.

        Except for historical information, the material contained in
this Description of Business is forward-looking.  For the purposes
of the safe harbor protection for forward-looking statements
provided by the Private Securities Litigation Reform Act of 1995,
readers are urged to review the list of certain important factors
set forth in "Cautionary Statement for Purposes of the "Safe
Harbor" Provisions of the Private Securities Litigation Reform Act
of 1995" below, which may cause actual results to differ materially
from those described.

SUMMARY OF RECENT ACQUISITIONS

        In January 2005, the Company acquired all of the outstanding
stock of AEC for $122,000 consisting of $83,000 in cash and 12,000
shares of the Company's Common Stock. AEC provides professional
consulting services in the areas of program evaluation, student
assessment, professional development and data collection and
reporting systems to state, federal and higher education
institutions as well as private companies.  In addition, options to
purchase 50,000 shares of the Company's Common Stock were granted
pursuant to the 2000 Stock Incentive Plan on the date of the
closing exercisable at $3.06 per share.  The options are
exercisable commencing one year from the closing, through January
2015. Goodwill totaling $118,074 was recorded as a result of the
acquisition.

        On July 1, 2005, the Company completed the acquisition of all
of the outstanding stock of ADI.  ADI provides on-line testing
capabilities to state testing programs and also offers an
electronic testing engine.  The total consideration paid by the
Company for the ADI stock was $1,650,000, consisting of $1,155,000
in cash, the issuance of 89,488 shares of Common Stock of the
Company (valued at approximately $331,650, based on the average of
closing prices for the Company's Common Stock for the five trading
days preceding the closing) and $163,350 in subordinated promissory
notes issued to two of the former stockholders of ADI.  The
promissory notes bear interest at the rate of 5% per annum and are
payable in six semi-annual installments of principal plus interest.
Goodwill totaling $1,653,309 was recorded as a result of the
acquisition. In connection with the acquisition of ADI, the Company
entered into a loan agreement with its bank, pursuant to which the
Company borrowed an aggregate principal amount of $1,200,000,
almost all of which was used to pay the purchase price for the
shares of ADI and closing costs for the transaction, with the
balance being retained by the Company for working capital.
Borrowings under the loan incur interest at the rate of 6.25% per
annum.  Interest only payments are due for the first year, and
thereafter monthly payments of principal and interest of $23,339
through July 2011. The $1,200,000 bank loan was subsequently
refinanced in May 2006.

        In May 2006 the Company acquired all of the outstanding shares
of Questar. Questar provides test delivery, scoring and score
analysis capabilities to state testing programs and also provides
test material development. Total consideration paid by the Company
was $20,000,000 consisting of $15,000,000 in cash, the issuance of
222,222 shares of Series A-2 Preferred Stock of the Company valued
at $1,000,000, and a $4,000,000 promissory note. Goodwill totaling
$11,678,544 was recorded as a result of the acquisition. The
Company also has valued and recorded $4,860,000 in intangible
assets identified during the acquisition. The Company has also
agreed to pay additional consideration in 2010 if Questar achieves
certain revenue goals during the three years ending October 31,
2007, 2008, and 2009. The maximum contingent earn out payment is
$12,500,000, of which up to $10,000,000 shall be paid half in cash
and half in Series A-2 Preferred Stock and $2,500,000 shall be
paid, if earned, at the election of the Company, in cash or
additional shares of Series A-2 Preferred Stock, or any combination
thereof, valued at fair market value at the time of issuance. The
Company financed the acquisition through senior debt and a private
equity investment.  The Company entered into a loan agreement (the
"Loan Agreement") with TD Banknorth, N.A. ("Banknorth"), pursuant
to which the Company borrowed a term loan in an aggregate principal
amount of $9,600,000, obtained a revolving line of credit in the
amount of $4,000,000 and had issued on its behalf a standby letter
of credit in the original stated amount of $194,750 against
availability under the revolving line of credit.  The Loan
Agreement contains ongoing financial covenants which are measured
on an annual basis beginning in October 2007.  The term loan was
interest-only for the first six months of the loan (through
November 2006), and thereafter is payable in fifty-four equal
monthly installments of principal and interest on a five-year
amortization schedule.  The Company has entered into an interest
rate swap agreement with Banknorth pursuant to which Banknorth is
paying the Company 250 basis points over the one month USD LIBOR
BBA rate and the Company is paying Banknorth a fixed rate of 7.95%
on a value of $9,600,000 declining concurrently with the term loan.
The interest rate swap agreement expires after thirty months on
December 1, 2008. The term loan balloons on May 30, 2011.  Advances
under the revolving line of credit are based on a borrowing base of
eligible accounts receivable and eligible inventory of the Company
and Questar.  The revolving line of credit is available until April
30, 2008.  Both the term loan and the revolving loan are secured by
the assets of the Company and by the assets of Questar.  The
proceeds from the loans were used to pay a portion of the purchase
price for the shares of Questar and closing costs for the
transaction, and for working capital.

        The Company also entered into a securities purchase agreement
(the "Series A Convertible Preferred Stock Purchase Agreement")
with Camden Partners Strategic Fund III, L.P. and Camden Partners
Strategic Fund III-A, L.P. (collectively, the "Investors"),
pursuant to which the Company issued and sold to the Investors
1,666,667 shares of its Series A-1 Convertible Preferred Stock
("Series A-1 Preferred Stock") valued at $7,500,000, based on a
price of $4.50 per share.  The proceeds from the sale of stock were
used to pay a portion of the purchase price for the shares of
Questar and closing costs for the transaction, with the balance
being retained by the Company for working capital.  Two members of
the Company's Board of Directors, Donald W. Hughes and David L.
Warnock are also principals of each of the Investors.

        The Company has been aggressively integrating the operations
of AEC, ADI and Quester into its operations generally since the
respective acquisitions of such companies.


PROPOSED CHANGE OF CORPORATE NAME

        The Company will be changing its corporate name to Questar
Assessment, Inc.  This action was approved on January 24, 2007 by
our Board of Directors, and as of February 5, 2007 by the holders
of a majority of our issued and outstanding voting securities who
have executed a written consent in lieu of a special meeting in
accordance with the relevant sections of the Delaware General
Corporation Law.  Subject to compliance with the requirements of
applicable securities laws and regulations, we expect the change in
our corporate name to become effective in mid- March 2007.

THE MARKET

        As previously stated in the Overview section, there has been a
decided shift over the past decade from the use of propriety
assessment products to custom tests developed to measure the
results of individual state standards.  This has been reflected
with the growth of the Company's custom test unit (BETA) as well as
the recent acquisitions of ADI, AEC and Questar.  Additionally, the
Company recognized this trend and has been using its assets to
build and expand its custom third party testing services.

        There are two components to the education industry that the
Company competes in: summative assessments which are part of the
NCLB state programs and the formative assessment programs that are
used in schools and test for instructional purposes.

        The acquisition of Questar integrated with the Company's
existing ability to develop and deliver custom test materials now
enables the Company to take advantage of the NCLB driven market
trend.  The Company, previous to the acquisition, did not have the
internal resources to bid on the large state custom-work contracts.
Questar has experience in terms of management, systems and staff to
win and manage large state-wide contracts that can deliver
significant economic value.  Questar's business has grown on it
being able to provide scoring, scanning and reporting services to a
state-wide student population level.  Management anticipates that
combining such capabilities with the Company's existing test
development resources will create incremental value for the
combined organizations.

BUSINESS DEVELOPMENT & MARKETING

        The Company markets its assessment products and services as
follows:

       *  Bidding on large scale contracts by responding to
          requests for proposal (RFP)

       *  Utilizing its sales and senior executives to develop
          relationships and insights in the education market

       *  Seeking partners by performing as either a prime or
          subcontractor on certain proposals based on our core
          capabilities

       *  Producing catalogs and other direct mail materials to
          support propriety sales

       *  Attending and presenting at trade conventions and
          industry shows to meet current and prospective clients

COMPETITION

        Success in the educational industry is based on technological
superiority, service, product support, the availability of patent
protection, and access to adequate capital, the ability to
successfully develop and market products and processes and the
ability to obtain government approvals.  Although there is intense
competition in the industry and there are both domestic and foreign
companies which may be deemed dominant competitors, the Company
believes that the features of its products coupled with its ability
to provide quality services will permit the Company to compete
successfully in its designated marketplace.

        The Company is subject to competition from various sources.
The Company's principal competition comes from established for-
profit and non-profit companies in the testing business and testing
departments within certain states and school districts, all of
which are considerably larger and have greater financial and human
resources and marketing capabilities.  Competition may also come
from education publishers who include reading comprehension tests
with their instructional materials and companies that distribute
reading motivation programs.

        Although there are a number of for-profit firms that develop,
publish, market, and distribute educational tests, the market is
dominated by a number of firms including: Pearson Educational
Measurement, Iowa City, Iowa; Harcourt Assessment, Inc., San
Antonio, Texas; CTB/McGraw-Hill, Lake Forest, Illinois, and
Monterey, California; and The Riverside Publishing Company,
Chicago, Illinois.  As large, well-established publishers of
educational tests and related products and services, these firms
are considered strong competitors of the Company.

        There are a number of for-profit and non-profit organizations
that provide test design, production and consulting services to
states under contract.  For example, National Evaluation Systems
(NES), Amherst, Massachusetts; and Pearson Educational Measurement,
Iowa City, Iowa; are among the for-profit firms that supply test
development, printing, distribution, and scoring services to
individual states under contract.  Among the non-profit
organizations, Measured Progress, Inc. (Dover, New Hampshire),
American College Testing Program (ACT), Iowa City, Iowa and
Educational Testing Services (ETS), Princeton, New Jersey have
conducted such contract work for states and ETS is the current
contractor for the National Assessment of Educational Progress.  By
enabling states to have tests developed and administered to their
own specifications, these for-profit and non-profit organizations
compete directly with the Company's assessment division.  In terms
of size alone, these firms have greater marketing capability and
resources than does the Company.

        Furthermore, there are a number of non-profit organizations
that develop, publish and distribute educational tests such as the
aforementioned ACT and ETS.  In addition, there are various
organizations that sponsor educational tests even though they do
not have the technical capability to produce tests.  For example,
The College Board, New York, New York, sponsors the SAT which is
developed for The College Board by ETS.  All of these non-profit
organizations have, or have access to, the capability to develop,
publish and distribute tests to schools.  Currently, ACT, The
College Board, and ETS publish one or more educational tests for
the school market.

EMPLOYEES

        As of October 31, 2006, the Company employed a total of 160
employees, of which 153 work on a full-time basis, and 7 work on a
part-time basis.  Of the 160 employees, 23 are engaged in research
and/or test development, 114 are in operations, 13 are in executive
capacities and 10 are in sales and marketing.

GOVERNMENT REGULATIONS

        NCLB legislation bodes well for TASA. NCLB requires that that
student success be measured against specific standards established
by each individual state. This state specific customization of
testing assessment ties directly into the Company's initiative to
expand its resources and service offerings in this area.  NCLB is
expected to provide annual funding for Fiscal 2007 of approximately
$24.3 billion* to this initiative.  Approximately half of that
amount is for Title I funding, which requires schools to use a
portion of this funding to evaluate student progress in reading.
The assessment and evaluation testing services being sought after
by states in the subject matter of reading as well as other
curriculums benefits the Company by having a large opportunistic
customer market to draw from.

        NCLB also provides over one billion dollars* for annual testing
in reading and math; Title III allows for three-quarters of a
billion dollars* for bilingual and immigrant education and almost
one billion dollars* for early language literacy.  TASA has
developed a full range of products and services to meet the needs
of this legislation. This includes test development for
"mainstream" programs in K-12 levels as well as English Language
Learners (ELL) and children eligible for alternative assessment.

  * Source - BMO Capital Markets Education and Training / September 2006

PATENTS, COPYRIGHTS, TRADEMARKS, TRADE SECRETS AND ROYALTIES

        The Company owns the copyrights in all of the proprietary
assessments and instructional materials that it creates and asserts
such rights as against third parties.

        The following are registered trademarks and/or service marks
of the Company:  TASA (for design and preparation of educational
testing materials and test scores); TASA (with logo) (for design
and preparation of educational testing materials and test scores);
TASA (with logo) (for computer programs used in association with
educational testing and instructional materials); Degrees of
Reading Power; DRP Program The Readability Standard; BROWZER-->
BOOKLINK (with logo); DRP-->EZ Converter; EZ Converter; DRP Linking
Text to Ability; BookMatch; MicRA-->DRP (with logo); TextSense;
TASA Literacy; Signposts; Signposts (with logo); We've Done the
Research for You; The MAC II Test of English Language Proficiency
(with logo); DWM and Degrees of Word Meaning; Questar Educational
Systems; Questar; Test Path; Score Point; and Service Point.  An
application for trademark registration is pending for SSSMART. TASA
is the owner of the service mark "Questar Educational Systems",
which is the only service mark registered with the United States
Patent & Trademark Office utilizing "Questar" in Class 41, relating
to educational testing and assessment services.

       Trade secrets are maintained by entering into license
agreements, containing trade secret clauses, with third parties for
their use of TASA software and certain proprietary data.  In
addition, all employees execute nondisclosure agreements as a
condition of employment.  The Company regularly asserts copyrights
to all of its assessment and instructional materials.

ITEM 2. DESCRIPTION OF PROPERTY

        The Company completed the sale/lease-back of its 30,000
square-foot headquarters building in Brewster, New York in July
2003.  The building was constructed in 1987, with the second phase
completed in 1991.  In July 2003, the Company sold its headquarters
building to 26 Palmer LLC for $2,875,000.  The building and related
improvements had a net book value of $1,458,481.  The Company
reported a pre-tax gain on the sale totaling $1,254,383, net of
closing costs totaling $162,136.  The Company then signed a ten-
year triple net lease for the building.  The cost per square foot
was $10.50 for the July 2003/June 2004 period and increases each
year thereafter.  The final year of the lease has a rental cost of
$13.69 per square foot.  As a result of the sale/leaseback, the
gain  is being recognized over the ten-year term of the lease as
other income.  Proceeds from the sale of the building were used to
repay debt, to increase the Company's working capital and to fund
the expansion of its scanning and scoring facility.  In the fall of
2003, the Company completed an expansion of this scanning and
scoring facility at a cost of approximately $250,000.  This
facility is now four times the capacity of the prior facility and
has accommodated new growing business in this area. Additionally,
subsequent to the end of Fiscal 2006, the Company entered into a
short term lease commitment (February 2007 - July 2007) to occupy
office space in Minnesota. The additional space was needed in order
to enable the Company to complete certain customer project
requirements during such period of time.  The Company presently
has no intention of renewing the lease after its termination.

        As part of the acquisition of Questar, the Company entered in
two separate lease agreements with the former shareholders of
Questar.  Through one lease agreement, the Company rents
approximately 49,000 square-feet of office space in Apple Valley,
Minnesota. The initial term of this lease is for five years
concluding on May 31, 2011 with the Company holding an option to
renew for an additional five-year period.  Pursuant to the second
lease agreement, the Company uses 45,000 square-foot of
distribution center also in Apple Valley, Minnesota. This lease
also concludes on May 31, 2011 with the Company holding an option
to renew for an additional five-year period.  The Company also
holds an option to lease an additional 11,000 square feet of
distribution center space that is adjacent to the current
distribution center. See "Certain Relationships and Related
Transactions".

        BETA rents a small office facility in Austin, Texas, which
affords good proximity to the Texas Education Agency. The Company's
current lease concludes in November 2007. The Company made the
decision to open the office in Texas because of the volume of
business in that state.

        ADI rents approximately 4,400 square feet of office space in
downtown Minneapolis, Minnesota. The Company's current lease
concludes in October 2007.  This space is used for offices,
conference rooms, workstations and houses its project management
personnel.

        The Company expends resources for capital improvements of its
facilities as necessary.

ITEM 3. LEGAL PROCEEDINGS

        None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        None.


<PAGE>

                                PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        The Company's common stock, par value $.0001 per share (the
"Common Stock"), is traded in the Nasdaq Electronic Bulletin Board
under the symbol TASA.OB.  The approximate high and low closing
prices for each fiscal quarter in the two fiscal years ended
October 31, 2005 and October 31, 2006 were as follows:

                      Common Stock Prices
       --------------------------------------------

       Fiscal Quarter:       High ($)       Low ($)
       ---------------       --------       -------


         1st Qtr 05            3.33          3.05
         2nd Qtr 05            3.70          3.00
         3rd Qtr 05            4.50          3.20
         4th Qtr 05            4.50          3.85
         1st Qtr 06            4.20          3.01
         2nd Qtr 06            3.75          2.75
         3rd Qtr 06            4.00          2.21
         4th Qtr 06            6.85          3.70

        During the first quarter of Fiscal 2007, the Company's Common
Stock had a high closing price of $7.50 and a low closing price of
$6.00; and during the second quarter of Fiscal 2007 (through March
2, 2007), the Company's Common Stock had a high closing price of
$7.10 and a low closing price of $6.00

        The Company is authorized to issue 5,000,000 shares, par value
$.0001 per share, of preferred stock. The stock may be issued by
the Board of Directors of the Company in one or more series and
with such preferences, conversion or other rights, voting powers
and other provisions as may be fixed by the Board of Directors in
the resolution authorizing its issuance without any further action
of the stockholders.

        The Company's Common Stock is traded on the Nasdaq Electronic
Bulletin Board.

        As of February 28, 2007, there were 66 holders of record of
the Company's Common Stock.  This number of holders of record does
not include beneficial owners of the Company's Common Stock, whose
shares are held in the names of various security holders, dealers
and clearing agencies.  The Company believes that the number of
beneficial owners of its Common Stock held by others or in nominee
names exceeds approximately 600 in number.

        The Company has not paid any cash dividends, and does not
anticipate doing so in the immediate future as it intends to invest
any earnings in the development of the Company's business.

        ACQUISITION OF QUESTAR.  The Company entered into a securities
        ----------------------
purchase agreement (the "Series A Convertible Preferred Stock
Purchase Agreement") with Camden Partners Strategic Fund III, L.P.
and Camden Partners Strategic Fund III-A, L.P. (collectively, the
"Investors" or the "Camden Entities"), pursuant to which the
Company issued and sold to the Investors 1,666,667 shares of its
Series A-1 Preferred Stock (valued at $7,500,000, based on a price
of $4.50 per share).  The proceeds from the sale of stock were used
to pay a portion of the purchase price for the shares of Questar
and closing costs for the transaction, with the balance being
retained by the Company for working capital.  The transaction did
not involve a public offering pursuant to the exemption from
registration provided by Section 4(2) of the Act.

        In the acquisition of Questar, the Company (a) issued to the
selling shareholders of Questar, 222,222 shares of Series A-2
Preferred Stock (valued at $4.50 per share), as part payment of the
purchase price at closing and (b) delivered to the escrow agent,
1,111,111 shares of the Series A-2 Preferred Stock (valued at $4.50
per share), which will be deemed earned by, and will be released
to, the former shareholders of Questar if revenue goals over the
earn out period of the three fiscal years ending October 31, 2007,
2008 and 2009, are met.  Such escrowed shares are not deemed to be
outstanding (and therefore, are not eligible to vote) until the
revenues goals are met and the shares are released from escrow.
The issuance and sale of the Series A-2 Preferred Stock did not
involve a public offering pursuant to the exemption from
registration provided by Section 4(2) of the Act.

        There is no trading market for the Company's Series A-1
Preferred Stock or Series A-2 Preferred Stock, and the Company has
no intention of applying to list shares of its Preferred Stock.
The Company has agreed to use its best efforts to file a
registration statement under the Act with respect to the shares of
Common Stock underlying the Series A-1 Preferred Stock, upon
request of the Investors, at any time following one year after the
issuance date of the Series A-1 Preferred Stock, in accordance with
the Investor Rights Agreement.  With respect to the 222,222 shares
of Series A-2 Preferred Stock issued as part payment of the
purchase price at closing, the Company has agreed to use its best
efforts to include such shares of Common Stock underlying the
Series A-2 Preferred Stock in a registration statement if, and
when, filed by the Company, upon request of the Investors, at any
time following one year after the issuance date of the Series A-1
Preferred Stock.  With respect to the escrowed shares, the Company
has agreed to use its best efforts to file a registration statement
under the Act for the shares of Common Stock into which the Series
A-2 Preferred Stock will be convertible, upon request of the former
shareholders of Questar following the release, if any, of the
escrowed shares, or to include such shares of Common Stock in a
registration statement if, and when, filed by the Company with
respect to the shares of Common Stock beneficially owned by the
Investors.

        Initially, the shares of Series A-1 Preferred Stock and the
Series A-2 Preferred Sock are convertible into shares of Common
Stock on a one-for-one basis.  The conversion rate is subject to
anti-dilution adjustments set forth in the Certificate of
Designations for the Series A Preferred Stock.  For the first three
years after the issuance, neither Series A-1 Preferred Stock nor
Series A-2 Preferred Stock will accrue dividends.  Thereafter,
dividends will accrue at the rate of 8% per annum, payable in cash
or additional shares of Series A Preferred Stock, at the election
of the Company; provided, however, that no shares of Series A-2
Preferred Stock will accrue any dividends until, and after the time
when, the Series A-2 Preferred Stock is released to the selling
shareholders of Questar in accordance with the Escrow Agreement.

        Each share of Series A-1 Preferred Stock is entitled to cast
one vote per each share of Common Stock into which such share of
Series A-1 Preferred Stock is convertible as of the record date for
a stockholder vote.  Each share of Series A-2 Preferred Stock that
has been issued to the selling shareholders of Questar on the
closing date is entitled to cast one vote per each share of Common
Stock into which such share of Series A-2 Preferred Stock is
convertible as of the record date for a stockholder vote.  The
shares of Series A-2 Preferred Stock that are held in escrow
pending release if the earn out hurdles are satisfied, will not be
entitled to vote so long as such shares remain in escrow.  The
shares of Series A-1 Preferred Stock and Series A-2 Preferred Stock
which are entitled to vote shall vote together with the Common
Stock as a single class.

        Upon closing of the acquisition of Questar, the Company issued
to Signal Hill Capital Group, LLC, a five-year warrant to purchase
up to 50,000 shares of the Company's Common Stock, at an exercise
price of $4.50 per share.  The warrant was issued as part of the
consideration paid to Signal Hill for its role as the Company's
investment banker and financial advisor in the acquisition of
Questar and the financing thereof.  Neither the warrant nor the
underlying shares of Common Stock have been registered under the
Act, in reliance upon the exemption from registration pursuant to
Section 4(2) of the Act.

        In connection with the sale of shares of Series A-1 Preferred
Stock to the Investors, the Company entered into a voting agreement
(the "Voting Agreement") with the Investors pursuant to which the
Company has agreed that so long as the Investors own at least 50%
of the Series A-1 Convertible Preferred Stock or the equivalent
number of shares of Common Stock of the Company if converted, the
Investors shall have the right to nominate up to three members of
the Board of Directors of the Company.  As of the date of this
Report, the Investors have nominated David L. Warnock, and Donald
W. Hughes as two of the members of the Board of Directors they are
permitted to nominate.  Messrs. Warnock and Hughes are incumbent
directors on the Board.  Pursuant to the Voting Agreement, certain
executive officers who are stockholders of the Company have agreed
that so long as the Investors own at least 833,333 shares of Series
A-1 Preferred Stock of the Company or the equivalent shares of
Common Stock of the Company if converted, at each meeting of
stockholders for the purpose of electing directors, to cast their
eligible votes in favor of the nominees of the Investors.  In
addition, at each meeting of stockholders for the purpose of
electing directors, the Investors have agreed to cast all of their
eligible votes in favor of the directors nominated by the Company.

        EQUITY COMPENSATION PLANS. The following table describes the
        -------------------------
equity securities of the Company issuable as of October 31, 2006
pursuant to the Company's equity compensation plans.  The Company
has four equity compensation plans, each of which has been approved
by the stockholders of the Company:  (1) the Amended and Restated
1991 Stock Incentive Plan (under which no further incentive awards
may be made); (2) the 2000 Stock Incentive Plan, as amended; (3)
the Amended and Restated Directors Stock Option Plan, as amended,
and (4) the Consultants Stock Incentive Plan.  For a description of
each of the Company's equity compensation plans, please see
"Executive Compensation Stock Incentive Plans".

<TABLE>
<CAPTION>


                       EQUITY COMPENSATION PLAN INFORMATION
                              AS OF OCTOBER 31, 2006
<S>               <C>                       <C>                     <C>
                     -----------------------------------------------------------------------------
                             Number of
                          securities to be                                 Number of securities
                            issued upon           Weighted-average       remaining available for
                            exercise of           exercise price of       future issuance under
                            outstanding              outstanding        equity compensation plans
                         options, warrants        options, warrants       (excluding securities
                             and rights              and rights           reflected in column (a))
                                 (a)                     (b)                       (c)
--------------------------------------------------------------------------------------------------
Equity compensation
plans approved by
security holders               818,228                 $2.704                    218,450
--------------------------------------------------------------------------------------------------
Equity compensation
plans not approved by
security holders                  --                     --                         --
--------------------------------------------------------------------------------------------------
</TABLE>




ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

        Except for historical information, the material contained in
this Management's Discussion and Analysis or Plan of Operation is
forward-looking.  For the purposes of the safe harbor protection
for forward-looking statements provided by the Private Securities
Litigation Reform Act of 1995, readers are urged to review the list
of certain important factors set forth in "Cautionary Statement for
Purposes of the "Safe Harbor" Provisions of the Private Securities
Litigation Reform Act of 1995" below, which may cause actual
results to differ materially from those described.

COMPANY BACKGROUND

        For over thirty years, TASA has served the rapidly expanding
education market.  Approximately three years ago the Company made
the decision to focus its activities and efforts in the K-12
assessment arena.  As a result, it marshaled its resources to build
both its internal capacity as well as to make strategic
acquisitions in order to round out its service offerings.

        In Fiscal 2005, the Company acquired Achievement Data Inc.
(ADI), which enabled the Company to provide on-line web based
assessments at a state-wide level.  It also acquired in Fiscal 2005
Assessment and Evaluation Concepts, Inc. (AEC) which expanded the
Company's capabilities into the third party program evaluation
field. In Fiscal 2006, the Company acquired Questar Educational
Systems.  With that acquisition, TASA can both manage large state
assessment programs as well as provide performance scoring
activities.

      As a consequence of these acquisitions TASA can now provide an
end-to-end testing solution or a full range of assessment services
to the education community.

RESULTS OF OPERATIONS

        Effective June 2006 TASA combined the previously separately
reported revenue categories of custom and proprietary since such
distinction is no longer representative of the Company's business.
Additionally, due the inclusion of the Questar revenues TASA will
be reporting Company revenues with Questar and without Questar.
Questar revenues are included beginning June 2006.  The following
table sets forth the revenues in each of these units and the annual
percentage change for each of these units for Fiscal 2006 and 2005:

      TASA Revenues Breakdown (in thousands of dollars) and
                     % of Year-To-Year Change


                                    Fiscal Year Ended October 31,
                                    -----------------------------

                                      2006                  2005
                                      ----                  ----

                                             %                    %
                                 $        Change        $      Change
                             ------------------------------------------

Revenues without Questar     $13,777.5     18%      $11,686.6     4.5%

Questar Revenues             $ 9,908.7     n/a      $      --      --%

Total Revenues               $23,686.2    103%      $11,686.6     4.5%


        The following are selected ratios as a percentage of total
revenues based on the Company's financial statements:

                                        -----------------------------
                                        Fiscal Year Ended October 31,
                                        -----------------------------
                                            2006           2005
                                        -----------------------------
      Total Revenues                        100%           100%
        Gross profit margins                 41%            49%
      Operating expenses:
        Selling expenses                      8%            12%
        General & administrative             37%            31%
      Income (loss) from operations         (4)%             6%
      Other income (expense)                (2)%             1%
      Income (loss) before income taxes     (6)%             7%

      Income tax expense (benefit)          (1)%             3%
      Net Income (loss) from operations     (5)%             4%

                                        ==============================

                                        ==============================




FISCAL 2006 AS COMPARED TO FISCAL 2005

        REVENUES.  The Company's revenues for Fiscal 2006 were
        --------
$23,686,213, representing a 103% increase, or $11,999,564, from
$11,686,649, for Fiscal 2005.  The overall increase was
attributable to growth in the custom testing arena along with the
inclusion of the Questar revenue beginning June 2006. TASA revenue,
exclusive of Questar, grew 18% year over year from $11.7 million in
Fiscal 2005 to $13.8 million in Fiscal 2006.

        COST OF GOODS SOLD.  Cost of goods sold increased by 135% or
        ------------------
$8,062,881 from $5,990,327 in Fiscal 2005 to $14,053,208 in Fiscal
2006.  As a percentage of revenue, cost of goods represented 51% of
revenues in Fiscal 2005 and 59% of revenues in Fiscal 2006.  The
dollar increase in Cost of Goods Sold is directly attributable to
the acquisition of Questar which was completed during the third
quarter of Fiscal 2006. In addition to Questar's effect on Cost of
Goods Sold, the Company incurred charges ($747,680) related to the
write off of certain non-performing products.

        GROSS PROFIT.  The Company's gross profit for Fiscal 2006
        ------------
increased by $3,936,683, or 69%, from $5,696,322 in Fiscal 2005 to
$9,633,005 in Fiscal 2006.  The gross profit margin was 41% in
Fiscal 2006 and 49% in Fiscal 2005. The Company determined in
Fiscal 2006 that certain proprietary products were non-performing
and having a limited useful life. Such products with a carrying
value of $747,680 were written off in Fiscal 2006. This write off
had a 3% negative effect on gross profit margins during Fiscal
2006. As the Company continues to bid and win larger custom
assessment projects, the gross margin as a percentage of revenue
may be less than the Company has historically realized, though the
net gross profits are likely to be larger.

        SELLING EXPENSES.  The Company's selling expenses increased by
        ----------------
$369,686, or 26%, from $1,432,287 in Fiscal 2005 to $1,801,973 in
Fiscal 2006.  Selling expense is 8% of revenues in Fiscal 2006
versus 12% in Fiscal 2005.  The net effect of the Questar
acquisition in the third quarter of Fiscal 2006 and thus the
inclusion of the related revenues from Questar, increased total
dollars spent on selling expenses though it decreased selling
expenses as a percentage of revenue.  In Fiscal 2006, the Company
expanded its sales force to include additional selling resources to
support both its custom and proprietary products and services.

        GENERAL AND ADMINISTRATIVE.  The Company's general and
        --------------------------
administrative ("G&A") expenses for Fiscal 2006 increased
$5,082,399, or 140%, from $3,637,098 in Fiscal 2005 to $8,719,497
in Fiscal 2006.  G&A expense is 37% in Fiscal 2006 versus 31% in
Fiscal 2005. The infrastructure component of G&A costs increased
significantly as a result of the acquisition of Questar completed
in Fiscal 2006. Additionally in 2006, the Company incurred
approximately $413,272 in charges resulting from a reorganization
of certain executive personnel positions along with the
reallocation of staff salaries. The Company also incurred charges
of $198,014 in Fiscal 2006 related to the expensing of employee
stock options. The Company has included in Fiscal 2006 charges of
approximately $421,000 related to the amortization of certain
intangible assets acquired from Questar on May 31, 2006.

        INCOME (LOSS) FROM OPERATIONS.  Income (loss) from operations
        -----------------------------
decreased by $1,515,402, or 242%, from $626,937 in Fiscal 2005 to a
loss of ($888,465) in Fiscal 2006.  As discussed in the above
sections, Fiscal 2006 Income (loss) from Operations was negatively
affected by charges to Cost of Goods Sold for non-performing
proprietary products ($747,680), and by the expenses, discussed
above under G&A, for the expansion of the sales force, certain
reorganization expenses and amortization expenses in connection
with the acquisition of Questar.

        EBITDA FROM OPERATIONS.  EBITDA is defined as earnings before
        ----------------------
interest expense, income tax expense, depreciation and
amortization.  EBITDA is not a measure of financial performance
under accounting principles generally accepted in the U.S., or
GAAP, and should not be considered an alternative to net income, or
any other measure of performance under GAAP, or to cash flows from
operating, investing or financing activities as an indicator of
cash flows or as a measure of liquidity.  EBITDA has its
limitations as an analytical tool, and you should not consider it
is isolation or as a substitute for analysis of our results as
reported under GAAP.  Some of the limitations of EBITDA are:

        * EBITDA does not reflect our cash used for capital
          expenditures;

        * Although depreciation and amortization are non-cash
          charges, the assets being depreciated or amortized often
          will have to be replaced and EBITDA does not reflect the
          cash requirements for replacements;

        * EBITDA does not reflect changes in, or cash requirements
          for, our working capital requirements; and

        * EBITDA does not reflect the cash necessary to make
          payments of interest or principal on our indebtedness.

        Because of these limitations, EBITDA should not be considered
as a measure of discretionary cash available to us to service our
debt or to invest in the growth of our business.  We compensate for
these limitations by relying on our GAAP results as well as on our
EBITDA.  Our management believes that EBITDA is useful in
evaluating our operating performance in relation to other companies
in our industry because the calculation of EBITDA generally
eliminates the effects of financings and income taxes which items
may vary for different companies for reasons unrelated to overall
operating performance.

        In order to facilitate an understanding of the components of
EBITDA and their effect on the results of operations, the following
table is provided as a reconciliation of reported income from
operations to EBITDA from operations.



                       EBITDA From Operations

                                  Fiscal 2006            Fiscal 2005

Income (loss) from Operations      $(888,465)            $  626,937
Depreciation & Amortization       $2,189,990             $  679,008
                                  ----------             ----------
EBITDA from Operations            $1,301,525             $1,305,945

        EBITDA on the Company's operations was $1,301,525 for Fiscal
2006 versus $1,305,945 for Fiscal 2005.  The decline in EBITDA from
operations is a direct result of the decline in income from
operations. As described above Fiscal 2006 income from operations
was negatively affected by certain charges to Cost of Goods Sold as
well as personnel and reorganization charges included in G&A.

        OTHER INCOME (EXPENSE).  Net other income (expense) decreased
        ----------------------
from $101,370 in Fiscal 2005 to ($485,172) in Fiscal 2006.  As the
result of the acquisition of Questar in Fiscal 2006, the Company
incurred an additional $427,136 of interest expense with respect to
borrowings that had not been in place in Fiscal 2005.

        INCOME (LOSS) AND EARNINGS (LOSS) PER SHARE.  The Company had
        -------------------------------------------
net income of $432,529 in Fiscal 2005 versus a net loss of
($1,124,845) in Fiscal 2006. The Company had diluted earnings per
share of $0.14 in Fiscal 2005 versus basic and diluted loss per
share of $(0.23) in Fiscal 2006. The diluted weighted average
shares outstanding were 3,023,262 in Fiscal 2005 versus 4,802,835
in Fiscal 2006.

LIQUIDITY AND WORKING CAPITAL

        WORKING CAPITAL.  Working capital decreased by $844,462 during
        ---------------
Fiscal 2006 from $2,846,516 at October 31, 2005 to $2,002,054 at
October 31, 2006.  The ratio of current assets to current
liabilities was approximately 2.02 to 1.0 at the end of the Fiscal
2005 versus 1.23 to 1.0 at the end of Fiscal 2006. The decrease in
working capital dollars as well as the decrease in the ratio is the
result of the acquisition of Questar in Fiscal 2006, which increased
the Company's short term debt.

        CASH FLOW PROVIDED BY (USED IN) OPERATING ACTIVITIES.  During
        ----------------------------------------------------
Fiscal 2006, the Company had net cash used in operating activities
of $(209,129), as compared to $550,575 provided by operating
activities in Fiscal 2005.  The decrease in cash from operating
activities resulted primarily from lower net income.  The year over
year change in net income (loss) decreased cash flow provided by
(used in) operating activities by $1,423,495.

        CASH FLOW USED IN INVESTING ACTIVITIES.  During Fiscal 2006,
        --------------------------------------
the Company had net cash used in investing activities of
($15,820,391) as compared to ($2,599,677) for Fiscal 2005.  The
increase in cash used in investing activities during Fiscal 2006 was
primarily the result of the acquisition of Questar. The Company
financed the acquisition of Questar through senior debt and a
private equity investment.  The Company entered into a loan
agreement (the "Loan Agreement") with TD Banknorth, N.A.
("Banknorth"), pursuant to which the Company borrowed a term loan
in an aggregate principal amount of $9,600,000, obtained a
revolving line of credit in the amount of $4,000,000 and had issued
on its behalf a standby letter of credit in the original stated
amount of $194,750 against availability under the revolving line of
credit.  The Loan Agreement contains ongoing financial covenants
measured on a yearly basis beginning in Fiscal 2007.  The term loan
is interest-only for the first six months of the loan, and then is
payable in fifty-four equal monthly installments of principal and
interest on a five year amortization schedule.  The Company has
entered into an interest rate swap agreement with Banknorth
pursuant to which Banknorth is paying the Company 250 basis points
over the one month USD LIBOR BBA rate and the Company is paying
Banknorth a fixed rate of 7.9% on a value of $9,600,000 declining
concurrently with the term loan.  The term loan balloons on May 30,
2011.  Advances under the revolving line of credit are based on a
borrowing base of eligible accounts receivable and eligible
inventory of the Company and Questar.  The revolving line of credit
is available until April 30, 2008.  Both the term loan and the
revolving loan are secured by the assets of the Company and by the
assets of Questar.  The proceeds from the loans were used to pay a
portion of the purchase price for the shares of Questar and closing
costs for the transaction, and for working capital.

        CASH FLOW PROVIDED BY FINANCING ACTIVITIES.  The Company had
        ------------------------------------------
net cash provided by financing activities of $15,529,178 for Fiscal
2006 as compared to $1,587,245 provided by financing activities for
Fiscal 2005. The cash provided by financing activities in Fiscal
2006 resulted primarily from the financing in connection with the
purchase of Questar.  The Company financed a portion of the purchase
price for Questar from the issuance of shares of its Preferred
Stock.  As part of the acquisition of Questar, the Company issued
and sold to investors 1,666,667 shares of its Series A-1
Convertible Preferred Stock (valued at $7,500,000, based on a price
of $4.50 per share), and issued to the former shareholders of
Questar 222,222 shares of Series A-2 Preferred Stock of the Company
(valued at $1,000,000, based on a price of $4.50 per share).  See
discussion under "Item 5-Market for Common Equity and Related
Stockholders Matters".

        During Fiscal 2006, options to purchase 15,750 shares of the
Company's Common Stock were exercised resulting in proceeds totaling
$32,752. Additionally, during Fiscal 2006 options to purchase 55,460
shares of the Company's Common Stock were exercised in a "Cashless"
transaction which required approval by the compensation committee.
During Fiscal 2005, options to purchase 42,500 shares of the Company's
Common Stock were exercised resulting in proceeds totaling $28,990.
Also, during Fiscal 2005, warrants to purchase 138,047 shares of common
stock were exercised resulting in proceeds of $155,303.

        In October 2006, we made the decision to refocus our
development, sales and marketing efforts into our growing customary
product line.  As a result of this decision, we incurred a write-off
of $610,588.  This expense consisted of the net value of costs of
underperforming proprietary products.


Long-term debt, operating leases and other long-term obligations as
of October 31, 2006 mature as follows:

<TABLE>
<CAPTION>

                                               Payments Due
                                               ------------
                                                                                 More Than
                                     0 - 12        13 - 36         37 - 60       ---------
Obligations             Total        months        months          months        60 months
-----------             -----        ------        -------         -------       ---------
<S>              <C>            <C>            <C>           <C>            <C>

Long-term debt      $13,865,237    $1,459,502     $3,777,828      $8,627,907     $       --

Operating Leases      6,347,386     1,422,196      2,261,360       1,977,763        686,067

Other long-term
obligations(1)        4,663,777     2,731,124      1,932,653              --             --
                    -----------------------------------------------------------------------

TOTAL
OBLIGATIONS         $24,876,400    $5,612,822     $7,971,841     $10,605,670     $  686,067
                    ===========    ==========     ==========     +==========     ==========

</TABLE>


(1)  Relate to employment contracts in effect at the end of the
current fiscal year.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

        The preparation of financial statements and related
disclosures in conformity with accounting principles generally
accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the
Consolidated Financial Statements and accompanying notes. Estimates
are used for, but not limited to, the accounting for the allowance
for doubtful accounts, inventories, income taxes and loss
contingencies. Management bases its estimates on historical
experience and on various other assumptions that are believed to be
reasonable under the circumstances. Actual results could differ
from these estimates under different assumptions or conditions.

        The Company believes the following critical accounting
policies, among others, may be impacted significantly by judgment,
assumptions and estimates used in the preparation of the un-audited
Consolidated Financial Statements:

        *  Revenues from the Company's sales of its proprietary
    tests, including sales of the related ancillary materials, are
    recognized when the Company ships the physical product from
    its warehouse.  The Company's revenues from performance of
    assessment consulting and psychometric services under long-
    term contracts are recognized on the percentage-of-completion
    basis pursuant to the provisions of Statement of Position No.
    81-1, "Accounting for Performance of Construction-Type and
    Certain Production-Type Contracts" and Accounting Research
    Bulletin No. 45, "Long-Term Construction-Type Contracts". For
    each contract, the Company compares the costs incurred in the
    course of performing such contract during a fiscal period to
    the total estimated costs of full performance of the contract,
    and recognizes a proportionate amount of revenue for such period.

        *  As a result of the sale-leaseback of the building, a
    deferred gain is being recognized over the ten-year term of
    the lease as other income for each period.

        *  Deferred tax assets are recorded based on the
    Company's projected future taxable income and the resulting
    utilization of the deferred tax assets. To the extent that the
    Company would not be able to realize all or part of its
    deferred tax assets in the future, a valuation allowance
    against the deferred tax assets would be necessary with a
    charge to income.

        *  We test goodwill and other identifiable intangible assets
    for impairment either annually, as required for goodwill, or when
    changes in circumstances or the occurrence of events suggests an
    impairment may have occurred.  The test for impairment requires us
    to make several estimates about fair value, most of which are based
    on total market capitalization as compared to the carrying value of
    our net assets.  If our total market capitalization is at or below
    the carrying value of our net assets, it may prompt us to engage a
    third party valuation firm to perform a valuation of us or the
    specific assets to further assess whether our goodwill or other
    identifiable intangibles are impaired pursuant to SFAS 142.  We
    consider our goodwill or other identifiable intangible asset impairment
    test estimates critical due to the amount of goodwill recorded on
    our balance sheet and the judgment required in determining fair value
    amounts.

        *  The process of writing and calibrating a test passage
    takes approximately two years, and all costs associated with
    the process are capitalized during this period. Amortization of
    these costs begins once the development period has elapsed,
    which in most cases, represents the point in time at which the
    new test passage is placed into the test passage bank and
    becomes available to be utilized within the Company's existing
    tests, or the point in time at which a newly developed test
    becomes available for sale.  Costs capitalized in connection
    with the development of passages used in the Company's DRP Test
    have been estimated to have a useful life of eleven years and,
    accordingly, are being amortized over an eleven-year period.
    Such amortization costs are included in the cost of goods sold
    in that period.  Costs capitalized in connection with the
    development of passages used in all other of the Company's
    tests have been estimated to have a useful life of seven years
    and, accordingly, are being amortized over a seven-year period.
    If these estimates of the useful lives of test passages prove
    to be shorter periods, the Company would be required to
    accelerate the amortization of these passages, resulting in a
    reduction in income.

        *  Effective November 1, 2005, the Company's 2000 Stock
    Incentive Plan (the "Plan") is accounted for in accordance
    with the recognition and measurement provisions of Statement
    of Financial Accounting Standards ("FAS") No. 123 (revised
    2004), Share-Based Payment ("FAS No. 123"R"), which replaces
    FAS No. 123, Accounting for Stock-Based Compensation, and
    supersedes Accounting Principles Board Opinion" (""APB") No.
    25, Accounting for Stock Issued to Employees, and related
    interpretations. FAS No. 123(R) requires compensation costs
    related to share-based payment transactions, including
    employee stock options, to be recognized in the financial
    statements. In addition, the Company adheres to the guidance
    set forth within Securities and Exchange Commission" (""SEC")
    Staff Accounting Bulletin" (""SAB") No. 107, which provides
    the Staff's views regarding the interaction between FAS No.
    123(R) and certain SEC rules and regulations and provides
    interpretations with respect to the valuation of share-based
    payments for public companies.

        Prior to November 1, 2005, the Company accounted for
similar transactions in accordance with APB No. 25 which
employed the intrinsic value method of measuring compensation
cost. Accordingly, compensation expense was not recognized for
fixed stock options if the exercise price of the option
equaled or exceeded the fair value of the underlying stock at
the grant date.

        While FAS No. 123 encouraged recognition of the fair
value of all stock-based awards on the date of grant as
expense over the vesting period, companies were permitted to
continue to apply the intrinsic value-based method of
accounting prescribed by APB No. 25 and disclose certain pro-
forma amounts as if the fair value approach of FAS No. 123 had
been applied.

        In adopting FAS No. 123(R), the Company applied the
modified prospective approach to transition. Under the
modified prospective approach, the provisions of FAS No.
123(R) are to be applied to new awards and to awards modified,
repurchased, or cancelled after the required effective date.
Additionally, compensation cost for the portion of awards for
which the requisite service has not been rendered that are
outstanding as of the required effective date shall be
recognized as the requisite service is rendered on or after
the required effective date. The compensation cost for that
portion of awards shall be based on the grant-date fair value
of those awards as calculated for either recognition or pro-
forma disclosures under FAS No. 123.

        As a result of the adoption of FAS No. 123(R), the
Company's results for Fiscal 2006 include stock option
compensation expense totaling $198,014. Such amount has been
included in the Consolidated Statements of Operations within
general and administrative expenses.  The Company recognized
related tax benefits associated with share-based compensation
arrangements totaling approximately $82,000 during Fiscal
2006.  The impact of the adoption is a reduction of net income
before tax and after tax for Fiscal 2006 of $198,014 and
$116,014, respectively.  In addition, basic and diluted net
income per share is decreased by approximately $(0.02).  There
was no impact on cash flows from operations and cash flows
from financing activities.

        Stock option compensation expense in 2006 is the
estimated fair value of options granted during fiscal 2006 and
the remaining portion of any unvested and outstanding options
granted prior to fiscal 2006, amortized on a straight-line
basis over the requisite service period for the entire portion
of the award.  The Company has not adjusted the expense by the
amount the estimated fair value of options forfeited as
indicated in FAS No. 123(R) since the forfeiture rate based
upon historical data was determined to be immaterial.

SELECTED FINANCIAL DATA

        The following tables summarize certain financial data for the
operations of the Company for Fiscal 2006 and 2005, respectively.
See "Financial Statements" in Item 8 below.

                                       Fiscal Year Ended October 31,

                                       2006                     2005
                                       ----                     ----
Income Statement Data:
Operating revenues                 $23,686,213              $11,686,649
Gross profit                         9,633,005                5,696,322
Income (loss) from operations         (888,465)                 626,937
Income (loss) before income taxes   (1,373,637)                 728,307
Net income (loss)                   (1,124,845)                 432,529
Diluted income (loss) per share
  from operations                       $(0.23)                   $0.14
Balance Sheets:
Current assets                     $10,827,084               $5,633,491
Total assets                        36,658,115               11,878,825
Current liabilities                  8,825,030                2,786,975
Long-term liabilities               13,193,707                2,232,467
Total liabilities                   22,018,737                5,019,442
Working capital                      2,002,054                2,846,896
Stockholders' equity                14,639,378                6,859,383

CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

        Certain statements contained in this Report contain "forward-
looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995.  These are statements that do not
relate strictly to historical or current facts.  Such forward-
looking statements involve known and unknown risks and
uncertainties.  The Company's actual actions or results may differ
materially from those discussed in the forward-looking statements.
These risk factors include, without limitation:

        * Rapid changes in (i) the technology used to administer
          standardized tests generally or market educational
          materials or (ii) in the policy considerations which
          determine which test will be administered;

        * Non-renewal of any of the Company's material state
          contracts;

        * Deficits in state and school budgets;

        * The loss of any significant customer;

        * The ability of the Company to compete successfully
          with the other providers of standardized tests (see
          "Description of Business--Competition", above);

        * The ability of the Company to accommodate any changes
          in government regulation which may impact the
          marketability of its tests (see "Description of Business-
          -Government Regulation", above);

        * The ability of the Company to secure additional
          financing as and when necessary;

        * The ability of the Company to retain the services of
          its key management and to attract new members of the
          management team;

        * The ability of the Company to effect and retain
          appropriate patent, copyright and trademark protection of
          its products; and

        * Any decrease in the market for educational consulting
          services.

        The Company undertakes no obligation to release publicly any
revisions to the forward-looking statements or to reflect events or
circumstances after the date of this Report.


<PAGE>

ITEM 7. FINANCIAL STATEMENTS

                             EXPLANATORY NOTE
                             ----------------

        Financial information required by this item appears in the
pages marked F-1 through F-36 at the end of this Report and are
incorporated herein by reference as if fully set forth herein.


               INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                     Page

Reports of Independent Registered Public Accounting Firm(s)          F-2&3


Consolidated Financial Statements:


     Consolidated Balance Sheets                                     F-4


     Consolidated Statements of Income                               F-6


     Consolidated Statements of Changes in Stockholders' Equity      F-8


     Consolidated Statements of Cash Flows                           F-9


Notes to Consolidated Financial Statements                           F-11




ITEM 8.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
          ACCOUNTING AND FINANCIAL DISCLOSURE

          None.


ITEM 8A.  CONTROLS AND PROCEDURES

        The Certifications required by Item 307 of Regulation
S-B are set forth after the signatures to this Report.

        (a)  Evaluation of disclosure controls and procedures.  As of
the end of the most recent fiscal year covered by this Annual Report
on Form 10-KSB, the Company evaluated the effectiveness of the
design and operation of its "disclosure controls and procedures"
("Disclosure Controls"), and its "internal controls and procedures
for financial reporting" ("Internal Controls").  This evaluation
(the "Evaluation") was done under the supervision and with the
participation of management, including Andrew Simon, the Company's
Chief Executive Officer ("CEO") and James Williams, the Company's
Chief Financial Officer ("CFO"). Rules adopted by the SEC require
that in each periodic report filed pursuant to the Securities
Exchange Act of 1934, as amended (the "Exchange Act"); the Company
presents the conclusion about the effectiveness of the Company's
Disclosure Controls and Internal Controls based on and as of the
date of the Evaluation.

        Disclosure Controls are procedures that are designed with the
objective of ensuring that information required to be disclosed in
our reports filed under the Exchange Act, such as this Annual
Report, is recorded, processed, summarized and reported within the
time periods specified in the rules and forms.  Disclosure Controls
are also designed with the objective of ensuring that such
information is accumulated and communicated to the Company's
management, including the CEO and CFO, as appropriate to allow for
timely decisions regarding required disclosure.  Internal Controls
are procedures which are designed with the objective of providing
reasonable assurance that (1) the Company's transactions are
properly authorized; (2) the Company's assets are safeguarded
against unauthorized or improper use; and (3) the Company's
transactions are properly recorded and reported, all to permit the
preparation of our financial statements in conformity with
generally accepted accounting principles.

        The Company's management does not expect that the Company's
Disclosure Controls or Internal Controls will prevent all errors
and all fraud. Any control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that
the objectives of the control system are met.  Further, the design
of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered
relative to their costs.  Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any,
within the Company have been detected.  These inherent limitations
include the realities that judgments in decision-making can be
faulty and that breakdowns can occur because of simple error or
mistake.  Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more
people, or by management override of the control.  The design of
any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated
goals under all potential future conditions; over time, control may
become inadequate because of changes in conditions, or the degree
of compliance with the policies or procedure may deteriorate.
Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be
detected.

        The Evaluation included a review of the controls' objectives
and design, the controls' implementation by the Company and the
effect of the controls on the information generated for use in this
Annual Report.  In the course of the Evaluation, we sought to
identify data errors, controls problems or acts of fraud and to
confirm that appropriate corrective action, including process
improvements, were being undertaken.  This type of evaluation will
continue to be done on a quarterly basis so that the conclusions
concerning controls effectiveness can be reported in each quarterly
Report on Form 10-QSB and the Annual Report on Form 10-KSB.  The
Company's Internal Controls are also evaluated on an ongoing basis
by the Company's finance personnel and by the Company's independent
auditors in connection with their audit and review activities.  The
overall goals of these various evaluation activities are to monitor
the Company's Disclosure Controls and Internal Controls and to make
modifications as necessary; it is the Company's intent in this
regard that the Disclosure Controls and the Internal Controls will
be maintained as dynamic systems change (including improvements and
corrections) as conditions warrant.

        Among other matters, the Company sought in the Evaluation to
determine whether there were any "significant deficiencies" or
"material weaknesses" in the Company's Internal Controls, or
whether the Company had identified any acts of fraud involving
personnel who have a significant role in the Company's Internal
Controls.  This information was important both for the Evaluation
generally and because items 4, 5 and 6 in the Section 302
Certification require that the CEO and CFO disclose that
information to the Board's Audit Committee and to the Company's
independent auditors and to report on related matters in this
section of the Quarterly Report.  In the professional auditing
literature, "significant deficiencies" are referred to as
"reportable conditions"; these are control issues that could have a
significant adverse effect on the ability to record, process,
summarize and report financial data in the financial statements.  A
"material weakness" is defined in the auditing literature as a
particularly serious reportable condition where the internal
control does not reduce to a relatively low level the risk that
misstatements caused by error or fraud may occur in amounts that
would be material in relation to the financial statements and not
be detected within a timely period by employees in the normal
course of performing their assigned functions.  The Company also
sought to deal with other control matters in the Evaluation, and in
case a problem was identified, we considered what revision,
improvement and/or correction to make in accordance with on-going
procedures.

        An evaluation was carried out under the supervision and with
the participation of the Company's management, including the CEO
and the CFO, of the effectiveness of the design and operation of
our disclosure controls and procedures (as defined in Rule 13a-
15(e) or 15d-15(e) under the Exchange Act) as of the end of the
period covered by this Annual Report.  Based upon that Evaluation,
the Company's CEO and CFO have concluded that the Company's
disclosure controls and procedures were effective at the end of the
period covered by this Annual Report and that information required
to be disclosed by the Company in reports that it files or submits
under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in SEC rules and forms.

        As previously disclosed, during the third quarter of Fiscal
2006, the Company acquired during the third quarter of Fiscal 2006
Questar and is thus including in its 2006 Statement of Operations
financial results for that entity from the date of acquisition. The
Company is in the process of evaluating Questar's internal controls
and procedures, and has not yet completed such evaluation for
purposes of setting forth its conclusions in this Report.  In this
process, nothing has come to the attention of the Company so far
which would require the Company to supplement the disclosure
contained in this Report.

PRIOR YEAR RESTATEMENTS:
------------------------

        Based on an evaluation in Fiscal 2005 the Company believed
that it did not have adequate personnel and technical resources
with respect to accounting for the sale-leaseback of the Company's
headquarters in July 2003.  As a result, the gain from the sale-
leaseback was originally recognized in its entirety in the third
fiscal quarter of 2003, during which the sale-leaseback occurred.
After consulting with the Company's independent registered public
accountants during Fiscal 2005, management concluded that such gain
should have been recognized over the ten-year term of the lease.
On May 24, 2005, the Company concluded that the Company should
restate it's audited consolidated financial statements for the
fiscal years ended October 31, 2003 and 2004, and its quarterly un-
audited consolidated financial statements for the quarters ended
July 31, 2003, January 31, 2004, April 30, 2004, July 31, 2004, and
January 31, 2005.  Such restatements do not affect the Company's
revenues from operations for any of these periods.  These
restatements reflect the correction in the Company's accounting for
the sale-leaseback transaction.

        During Fiscal 2006 the Company identified a previously
unrecorded liability for employees' earned but unused vacation. The
Company's policy has been to allow employees who have earned
vacation hours as a result of their employment to carry forward a
limited amount of the unused vacation at the Company's fiscal year
end into the subsequent period. If an employee were to terminate
employment with the Company, the value (based upon such employee's
daily pay rate) of any earned but unused vacation would be paid by
the Company in the form of a cash payment to the former employee.
This carry forward provision within the Company's employee benefits
policy creates an accrued liability that, in accordance with
accounting principles generally accepted in the United States,
should be valued and recorded as a liability  during each fiscal
reporting period.  As a result, the Company recorded a liability
valued at $259,866 and $189,141 for the fiscal years ended October
31, 2005 and 2004 respectively. The effect of recording this
liability resulted in a reduction of net income before tax of
$70,725 and $33,602 for Fiscal 2005 and Fiscal 2004, respectively.
On January 16, 2007 the Company concluded that the Company should
restate its consolidated financial statements for Fiscal 2005 and
Fiscal 2004.  The Audit Committee of the Board also concluded that
the financial impact of such change in unused vacation liability on
the Company's un-audited consolidated financial statements for
individual fiscal quarters ended during Fiscal 2005, 2004 and 2003
was immaterial, and therefore no restatement of the interim
financial statements for such periods was deemed necessary.   The
restatements for Fiscal 2005 and Fiscal 2004 do not affect the
Company's revenues from operations for either such fiscal year.
These restatements reflect the inclusion of a previously unrecorded
liability for employees' earned but unused vacation. The restated
consolidated financial statements for Fiscal 2005 and Fiscal 2004
were filed with the SEC on January 26, 2007. The financial
statements for Fiscal 2006 and 2005 included in this Report include
a recorded liability for employees' earned but unused vacation.

        As of the end of Fiscal 2004 and Fiscal 2005, the Company's
management, including the CEO, concluded that, because the Company
had not separated the CEO and CFO functions, the Company's
Disclosure Controls were not effective at the end of such fiscal
years to ensure that information required to be disclosed by the
Company in reports that it files or submits under the Exchange Act
is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms.  The Board of Directors
of the Company authorized the hiring of a CFO for the Company. In
June 2006, the Company hired its current CFO thus achieving the
separation of the CEO function and the CFO function.

        (b)  Changes in Internal Controls.  There were no changes
in the Company's Internal Controls in the Company's fourth fiscal
quarter that materially affected, or are reasonably likely to
materially affect, the Company's Internal Controls.

ITEM 8B.  OTHER INFORMATION

          None.

<PAGE>
                                  PART III

ITEM 9.   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
          PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

        As of February 28, 2007, the directors and executive officers
of the Company were as follows:

     Name                  Age         Position
     ----                  ---         --------

Michael D. Beck             60   Director; Sr. Vice President, TASA; and
                                 President, Chief Executive Officer, BETA

Steven R. Berger(1)(2)      51   Director

Donald W. Hughes(1)         56   Director

Theodore Naegeli            55   Director

Chris L. Nguyen(1)(2)       45   Director

Andrew L. Simon             64   Chairman of the Board of Directors;
                                 President, Chief Executive Officer, TASA

Linda G. Straley            50   Director; Sr. Vice President, and
                                 Secretary, TASA

Thomas G. Struzzieri(1)(2)  48   Director

David L. Warnock(2)         49   Director

James J. Williams           39   Chief Financial Officer, TASA

________________________
(1)	Member of the Audit Committee

(2)	Member of the Compensation Committee.

        Each director shall hold office until the earliest of the next
annual meeting of the Company's stockholders or his or her
resignation and until a successor is selected and qualified.

        MICHAEL D. BECK was elected as a Director of the Company in
March 1997 and has been Sr. Vice President of the Company since
January 1997.  Mr. Beck is also a Director and President and Chief
Executive Officer of BETA.  Since 1983, Mr. Beck has been President
of BETA, which provides consulting and contractual services to
school districts, state education departments and test and textbook
publishers.  As of January 2, 1997, BETA became a wholly-owned
subsidiary of the Company and Mr. Beck continues to serve as the
President of BETA.  Mr. Beck has also provided consulting services
on matters of educational research and assessment for various
military, governmental and commercial organizations.  Mr. Beck
received an A.B. from John Carroll University and an M.A. from
Fordham University.

        STEVEN R. BERGER was elected as a Director of the Company in
March 1996 and he also serves on each of the Company's Compensation
and Audit Committees.  Mr. Berger is currently a shareholder in the
law firm of Vedder, Price, Kaufman & Kammholz, P.C. in New York
City.  The Company has retained Vedder, Price, Kaufman & Kammholz,
P.C. since October 2002 as its special securities counsel.
Previously, Mr. Berger was a partner in the law firm of Salans from
January 1989 through September 2002.  Salans acted as special
securities counsel to the Company from January 1995 through
September 2002.  Mr. Berger received an A.B. from Harvard
University and a J.D. from Harvard Law School.

        DONALD W. HUGHES was elected as Director in June 2001.  Since
July 2001, Mr. Hughes has served on, and is Chairman of, the
Company's Audit Committee.  Since 1999, Mr. Hughes has served as
Executive Vice President and Chief Financial Officer of Camden
Partners, Inc. and a member of and Chief Financial Officer of
Camden Partners Holdings, LLC, each of which is an affiliate of
Cahill Warnock.  Mr. Hughes has served as an officer of Cahill
Warnock since February 1997 and is a General Partner and Chief
Financial Officer of Cahill Warnock.  Prior to joining Cahill
Warnock in February 1997, Mr. Hughes had served as Vice President,
Chief Financial Officer and Secretary of Capstone Pharmacy
Services, Inc. from December 1995 and as Executive Vice President
and Chief Financial Officer of Broventure Company, Inc., a closely-
held investment management company, from July 1984 to November
1995.  Mr. Hughes also serves on the board of New Horizons
International, Inc. and Accruit, LLC.  Mr. Hughes received a B.A.
from Lycoming College and an M.S.F. from Loyola College in
Maryland, and is a Certified Public Accountant.

        THEODORE NAEGELI was elected as a Director in September 2006.
Mr. Naegeli is one of the founders of Questar Educational Systems,
Inc. and served as its CEO from its inception until its sale to
TASA in May 2006.  In addition to those duties, he has served as
President of Questar Data Systems, Inc. since 1991. In addition,
Mr. Naegeli served as President of National Business Systems, Inc.
(NBS) from 1994 to 2001.  He was CFO of NBS prior to taking over
the presidency.  Mr. Naegeli worked as a CPA in public accounting
prior to joining NBS.  He holds a B.S. in Accounting from the
University of Minnesota.

        CHRIS L. NGUYEN was elected as a Director at the Annual
Stockholders Meeting of the Company in April 2004.  Mr. Nguyen was
a senior executive with Sylvan Learning Systems from 1989 to 1996.
During his tenure at Sylvan, Mr. Nguyen was COO of Sylvan's
computer-based testing division, Sylvan Prometric.  From 1996
through 2001, Mr. Nguyen was President and CEO of Caliber Learning
Network, a publicly-traded company specializing in distance
learning services for adults.  Currently, Mr. Nguyen is the
principal and owner of Dynanet Consulting Services, LLC.  Dynanet
provides management consulting and technology development services
to companies within the education and testing markets.  Mr. Nguyen
received a B.A from Johns Hopkins University.

        ANDREW L. SIMON was elected as Director and as President in
March 1995.  Mr. Simon serves as Chairman of the Board of
Directors.  Mr. Simon is also a Director and Secretary of BETA.  He
served as Interim President of TASA from June 1994 through March
1995.  He was a founder of the Company and previously served as a
Director from 1976 to 1991 and has acted as a financial consultant
to the Company since its inception in 1976.  From 1983 to 1986, he
was a Vice President/Marketing Division Head in the Private Clients
Group at Bankers Trust Company.  He was a Vice President at
Citibank, NA, where he held a number of senior marketing and sales
positions, from 1980 to 1983.  Prior to 1980, Mr. Simon served as
Marketing Director for several consumer package goods companies
including Norcliff-Thayer and Lederle Laboratories.  He holds an
M.B.A. from Columbia University and a B.A. from Washington
University.  Mr. Simon is on The George Washington University
National Council for Education and Human Development and a director
of The Hudson Valley Trust.

        LINDA G. STRALEY was elected as a Director of the Company and
has been Sr. Vice President since June 1994.  From June 1994
through March 1995, she was Chairman of the Board of Directors.
She has been Secretary since August 1992 and, from 1984 to 1994,
she served as director of DRP Services for the Company.  Ms.
Straley received a B.A. in Education from Bethany College and an
M.S. in Educational Psychology and Statistics from the State
University of New York.

        THOMAS G. STRUZZIERI was elected a Director of the Company in
June 2000.  He serves on each of the Company's Audit and
Compensation Committees.  Mr. Struzzieri is the owner of Horse
Shows In The Sun (HITS).  Based in Saugerties, New York, HITS
produces horse shows in California, Florida, Virginia, New York,
and Arizona.  Mr. Struzzieri is a director of the United States
Equestrian Federation, and is a founding member and a director of
the United States Hunter/Jumper Association.  He also serves on the
Board of Directors of the United Way of Ulster County and the
Ulster County Development Corporation, and is a member of the SUNY
Ulster County Community College Board of Trustees.  Mr. Struzzieri
is a member of the Chamber of Commerce of Ulster County as well as
the Business and Community Leaders' Advisory Committee of the
Institute of Ecosystem Studies.  Mr. Struzzieri attended Vassar
College.

        DAVID L. WARNOCK was elected as a Director of the Company in
October 1998 and, since that time, he has also served on the
Company's Compensation Committee.  Since 1999, Mr. Warnock has been
President and Chief Executive Officer of each of Camden Partners,
Inc. and Camden Partners Holdings, LLC, each of which is an
affiliate of Cahill Warnock.  Mr. Warnock is a founding partner of
Cahill, Warnock & Company, LLC, an asset management firm
established in 1995 to invest in small public companies.  From 1983
to 1995, Mr. Warnock was with T. Rowe Price Associates in senior
management positions, including President of the corporate general
partner of T. Rowe Price Strategic Partners and T. Rowe Price
Strategic Partners II, and as the Executive Vice President of T.
Rowe Price New Horizons fund.  Mr. Warnock also serves on the
Boards of Directors of Bridges Learning Systems, The National
Alliance to End Homelessness, the Center for Fathers, Families and
Workforce Development, Nobel Learning Communities, Inc., and
American Public Education, Inc.  Mr. Warnock received a B.A. in
History from the University of Delaware and a Masters in Finance
from the University of Wisconsin.

        JAMES J. WILLIAMS was appointed Chief Financial Officer of
TASA in June 2006. Prior to his employment at TASA, Mr. Williams
held senior financial and operational roles for Tech Depot, one of
the major subsidiaries of Office Depot, an industry leader in the
distribution and sale of office supply products.  Prior to his
position at Office Depot, Mr. Williams was the Chief Financial
Officer for 4SURE.com, a privately held organization specializing
in the sale of technology products to businesses and public
institutions.  From 1993 through 1999, Mr. Williams held senior
financial positions within Daymon Associates, Inc. and Louis
Vuitton Moet Hennessey (LVMH).  Mr. Williams holds a degree in
Accounting from Pace University. He is a certified public
accountant (CPA) with memberships in the New York State Society
Certified Public Accountants (NYSSCPA) and the American Institute
of Certified Public Accountants (AICPA).

ITEM 10.  EXECUTIVE COMPENSATION

        The following table shows compensation for services rendered
to the Company during Fiscal 2006 and 2005, respectively, by the
Chief Executive Officer, the Chief Financial Officer, the President
of BETA, and the Senior Vice President of TASA, a President of ADI,
and the former Sr. Vice President of the Company's proprietary
unit.  Each executive officer serves under the authority of the
Board of Directors. No other executive officer of the Company
received cash compensation that exceeded $100,000 during Fiscal
2006.  Therefore, pursuant to Item 402 of Regulation S-B, only
compensation for each of the persons listed below is shown in the
Summary Compensation Table below.


<TABLE>
<CAPTION>

                      SUMMARY COMPENSATION TABLE



                                            Annual Compensation                Long-Term Compensation
                                     ------------------------------------------------------------------
                                                                               Awards             Payouts
                                                                               --------------------------

                                                                           Restricted     Securities            All Other
                                                            Other Annual     Stock        Underlying     LTIP    Compen-
 Name and Principal                   Salary      Bonus     Compensation    Award(s)       Option/      Payouts  sation
     Position                Year       ($)        ($)           ($)          ($)          SARs(1)        ($)      ($)
-----------------------------------------------------------------------------------------------------------------------
<S>                       <C>     <C>         <C>         <C>            <C>         <C>              <C>       <C>
Andrew L. Simon,             2006    $288,167    $195,000    $24,657(2)       0           50,000/0(2)      0         0
President and                2005    $244,000       --       $24,311(2)       0               --  (2)      0         0
Chief Executive
Officer
-----------------------------------------------------------------------------------------------------------------------
Michael D.                   2006    $185,417     $60,000    $23,346(3)       0           20,000/0(3)      0         0
Beck, Sr. Vice               2005    $175,000       --       $24,589(3)       0               --  (3)      0         0
President,
TASA;
President and
Chief
Executive
Officer, BETA
-----------------------------------------------------------------------------------------------------------------------
Linda G.                     2006    $149,323     $20,000    $16,591(4)       0           15,000/0(4)      0         0
Straley                      2005    $113,000       0        $14,830(4)       0            6,000/0(4)      0         0
Sr. Vice
President and
Secretary,
TASA
-----------------------------------------------------------------------------------------------------------------------
Martin Borg,                 2006    $175,000       --       $13,581(5)       0                0/0(5)      0         0
President, ADI               2005                                                         40,000/0(5)      0         0
-----------------------------------------------------------------------------------------------------------------------
Anne H. Cheevers             2006    $170,000       --        $5,539(6)       0                0/0(6)      0         0
Senior Vice                  2005    $114,024     $35,000     $3,127(6)       0           40,000/0(6)      0         0
President &
COO TASA
(terminated
effective
February 2007)
-----------------------------------------------------------------------------------------------------------------------
James J. Williams,           2006    $104,146     $50,000     $1,710(7)     0             50,000/0(7)      0         0
Chief Financial              2005       --           --          --           --             --           --        --
Officer
(hired June 2006)
-----------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)     To date, the Company has issued no SARs.

(2)     Includes: contributions to the Company's qualified 401(k)
        Profit Sharing Plan (the "401(k)") and the Company's Money
        Purchase Pension Plan (the "Pension Plan") of $11,000 in Fiscal
        2006, and $10,500 in Fiscal 2005; and $8,250, and $8,250, for a
        company car in Fiscal 2006 and 2005, respectively.  Also
        includes: stock options issued pursuant to the Company's 2000
        Stock Incentive Plan after the end of each of Fiscal 2006 and
        Fiscal 2005 in respect of such fiscal years, respectively.

(3)     Includes: contributions to the Company's 401(k) and Pension
        Plan of $9,321 in Fiscal 2006, and $10,500 in Fiscal 2005; and
        $8,906, and $8,906 for a company car in Fiscal 2006 and 2005,
        respectively.  Also includes: stock options issued pursuant to
        the Company's 2000 Stock Incentive Plan after the end of each of
        Fiscal 2006 and Fiscal 2005 in respect of such fiscal years,
        respectively.

(4)     Includes: contributions to the Company's 401(k) and Pension
        Plan of $7,521 in Fiscal 2006, and $6,305 in Fiscal 2005; and
        $3,540 and $3,540 for a company car in Fiscal 2006 and 2005,
        respectively.  Also includes: stock options issued pursuant to
        the Company's 2000 Stock Incentive Plan after the end of each of
        Fiscal 2006 and Fiscal 2005 in respect of such fiscal years,
        respectively.

(5)     Includes: contributions to the Company's 401(k) and Pension
        Plan of $8,750 in Fiscal 2006;  Also includes: stock options
        issued pursuant to the Company's 2000 Stock Incentive Plan after
        the end of Fiscal 2006.

(6)     Includes: contributions to the Company's 401(k) and Pension
        Plan of $708 in Fiscal 2006; stock options issued pursuant to
        the Company's 2000 Stock Incentive Plan upon hiring and after
        the end of Fiscal 2005 in respect of such fiscal year.

(7)     Includes: stock options issued pursuant to the Company's
        2000 Stock Incentive Plan upon hiring; also includes incentive
        bonus of $50,000 upon hiring.

EMPLOYMENT CONTRACTS

        On March 1, 1996, the Company entered into an employment
agreement with each of Andrew L. Simon and Linda G. Straley,
pursuant to which the Company agreed to employ Mr. Simon and Ms.
Straley, and each of Mr. Simon and Ms. Straley agreed to remain, as
the Company's President and Chief Executive Officer, and Sr. Vice
President, respectively, for a term of three years, subject to
automatic yearly extensions and certain rights of termination as
provided in each such agreement.

        As of January 2, 1997, the Company entered into an employment
agreement with Michael D. Beck, pursuant to which the Company
agreed to employ Mr. Beck, and Mr. Beck agreed to remain, as Sr.
Vice President of TASA and President and Chief Executive Officer of
BETA, for a term of three years, subject to automatic yearly
extensions and certain rights of termination as provided in such
agreement.

        In the employment agreements with each of Messrs. Simon and
Beck and Ms. Straley, the Company has agreed to provide for certain
benefits and protections for such executive officers in connection
with a change of control of the Company.  Such agreements provide
that upon the occurrence of a change of control (as defined in each
agreement) and the termination of such executive's employment
agreement, each such executive officer would be awarded a lump sum
bonus equal to and one-half times such executive officer's base
salary plus such executive's highest annual bonus during the
preceding three fiscal years, such lump sum bonus to be paid for
each of three years following termination of employment following a
change in control.  .

        In February 2005, the Company entered into an employment
agreement with Anne H. Cheevers as Senior Vice President and Chief
Operating Officer, TASA - Proprietary Division, for an initial one-
year term, automatically renewable for additional one-year terms,
subject to early termination notices given by either party prior to
the expiration of the then current term.  The Company has elected
not to renew Ms. Cheever's employment contract after February 2007.

        In June 2006, the Company entered into an employment agreement
with James J. Williams as Chief Financial Officer of TASA for a two
year term subject to early termination notices given by either
party prior to the expiration of the current term.  Pursuant to
such employment agreement, Mr. Williams will be paid an annual base
salary of $250,000, receive an annual car allowance of $7,200, and
will be eligible to receive annual incentive bonus.  As condition
of his employment, Mr. Williams was paid a $50,000 bonus in
November 2006.  Mr. Williams was granted 50,000 options to purchase
shares of the Company's Common Stock pursuant to the Company's
stock option plan, at an exercise price of $4.50 per share, subject
to vesting to a three year vesting schedule.

        The Company entered in two-year employment agreements with the
two officers of AEC. Pursuant to the agreements, the officers of
AEC are entitled to a base salary and bonuses determined by the
attainment of certain performance goals. In addition, an aggregate
of 50,000 options to purchase shares of the Company's Common Stock
were granted to such persons pursuant to the 2000 Stock Incentive
Plan at $3.06 per share.

        The Company has entered into employment agreements for an
initial forty-month term with two of the former shareholders of
ADI.  In addition, the former shareholders of ADI who are
continuing with ADI were granted an aggregate of 60,000 options to
purchase additional shares of the Company's Common Stock, at an
exercise price of $3.75 per share, subject to vesting upon the
completion of one year of employment.  The Company also entered
into an employment agreement for an initial twenty-eight month term
with a key employee of ADI.

        The Company has entered into employment agreements for an
initial twenty-four month term with certain members of the
management of Questar.  Such employment agreements with the Questar
management team include non-competition covenants and proprietary
rights agreements.

        Generally, each employee of the Company has agreed to the
assignment to the Company of the employee's rights to any
inventions relating to the Company's business or interest which
were conceived both prior to and during the period of employment
and, except under certain specified conditions, the Company's
employees are prohibited from competing for one year with the
Company in areas in which he or she was employed.

STOCK INCENTIVE PLANS

        The Board of Directors of the Company adopted the 1991 Stock
Option Incentive Plan (the "Option Plan") on August 25, 1991 in
order to attract and retain qualified personnel, which Option Plan
was approved by the stockholders on August 25, 1991.  The Board of
Directors adopted the Amended and Restated 1991 Stock Option
Incentive Plan (the "Amended Option Plan") in February 1996, which
Amended Option Plan amended and restated the Option Plan and was
approved by the stockholders of the Company on March 29, 1996.
Under the Amended Option Plan, options to purchase up to 625,000
shares of Common Stock were available to be granted to employees,
officers, directors and consultants of the Company.  The Amended
Option Plan terminated in 2001, after which no further options or
stock awards may be issued under the Amended Option Plan; all
options and other stock awards outstanding under the Amended Option
Plan at the termination date shall continue to be outstanding and
may be exercised in accordance with their respective terms, until
such options or other stock awards expire by their terms.

        The Board of Directors of the Company adopted the 2000 Stock
Incentive Plan (the "2000 Plan") in February, 2000. The
stockholders of the Company approved the 2000 Plan at the Company's
Annual Meeting of Stockholders held on March 31, 2000.  Under the
2000 Plan, options or other stock awards with respect to up to
300,000 shares of the Company's Common Stock may be granted to
employees, officers, directors and consultants of the Company.  In
addition, any options outstanding under the Amended Plan, which
expire after the adoption of the 2000 Plan, are added to the number
of shares available under the 2000 Plan.  The terms of the 2000
Plan are substantially identical to the terms of the Amended Option
Plan, except for provisions with respect to the number of shares
which may be issued under the 2000 Plan and the expiration date of
the 2000 Plan.  At the Annual Meeting of Stockholders held on April
29, 2005, the stockholders approved an amendment to the 2000 Plan
increasing by 200,000 the number of shares eligible to be issued
pursuant to the 2000 Plan.

        Each of the Amended Option Plan and the 2000 Plan
(collectively, the "Option Plans") is administered by the
Compensation Committee of the Board of Directors (the "Committee").
Subject to the terms of the Option Plans, the Committee is
authorized to select optionees and determine the number of shares
covered by each option and certain of its other terms.  The
exercise price of stock options granted under the Option Plans may
not be less than the fair market value of the Company's Common
Stock on the date of the grant.  In general, options become
exercisable after the first anniversary of the date of grant.
Effective for options granted under the 2000 Plan in Fiscal 2006
and thereafter, such options will become exercisable in three equal
annual installments following the grant date.  The period within
which any stock option may be exercised cannot exceed ten years
from the date of grant.  Options held by a terminated employee
expire three months after termination except in the event of death,
disability or termination for cause.  No one participant may
receive, in any one fiscal year, awards under the Option Plans
which would entitle the participant to receive more than 50,000
shares.

        The following table summarizes the options granted, exercised
and cancelled or expired under the Amended Option Plan and the 2000
Option Plan during the preceding three fiscal years:


                                 Fiscal 2006     Fiscal 2005     Fiscal 2004

Options granted                    142,500         216,000          73,000
Options exercised                   70,210          45,000          19,250
Restricted shares awarded               --              --              --
Options canceled/expired            51,025          53,500              --

        As of October 31, 2006, options to purchase up to an aggregate
of 463,300 shares were outstanding under the 2000 Plan.  As of
October 31, 2006, options to purchase up to an aggregate of 256,553
shares were outstanding under the Amended Option Plan.


<TABLE>
<CAPTION>


                    OPTION/SAR GRANTS IN LAST FISCAL YEAR
                             (INDIVIDUAL GRANTS)

                         Number of     Percent of Total
                         Securities      Options/SARs
                         Underlying       Granted to
                       Options/SARs(1)   Employees in      Exercise Or Base
Name                     Granted (#)      Fiscal Year      Price ($/Share)    Expiration Date
---------------------------------------------------------------------------------------------
<S>                   <C>               <C>             <C>                 <C>

Andrew L. Simon,
President, Chief
Executive Officer and
Chief Financial
Officer                     50,000            35%               $4.50*          6/1/2016
---------------------------------------------------------------------------------------------
Michael D. Beck,
Sr. Vice President, TASA;
President and Chief
Executive Officer,
BETA                        20,000            14%               $4.50*          6/1/2016
---------------------------------------------------------------------------------------------
Linda G. Straley,
Sr. Vice President and
Secretary, TASA             15,000            11%               $4.50*          6/1/2016
---------------------------------------------------------------------------------------------
Martin Borg,
President, ADI                   0            --                  --               --
---------------------------------------------------------------------------------------------
Anne H. Cheevers,
Senior Vice President,
TASA (employment will
cease February 2007)             0            --                  --               --
---------------------------------------------------------------------------------------------
James J. Williams,          50,000            35%               $4.50*          6/26/2016
Chief Financial Officer,
TASA
---------------------------------------------------------------------------------------------
</TABLE>

        (1) To date, the Company has issued no SARs.

        (2) The exercise price on these particular grants for the
listed employees was issued at a premium to the normal prevailing
exercise price, and was equal to the conversion price of Preferred
Stock issued in connection with the Questar acquisition.


<TABLE>
<CAPTION>

                  AGGREGATED OPTION/SAR EXERCISES IN LAST
                FISCAL YEAR AND FISCAL-END OPTION/SAR VALUES

------------------------------------------------------------------------------------------------

                                                             Number of
                                                             Securities          Value of
                                                             Underlying         Unexercised In-
                                                            Unexercised           the-Money
                                                           Options/SARs(1)      Options/SARs(1)
                                                            at FY-End (#)        at FY-End ($)
------------------------------------------------------------------------------------------------
                            Shares
                         Acquired on     Value Realized      Exercisable/        Exercisable/
    Name                 Exercise (#)         ($)           Unexercisable       Unexercisable
-------------------------------------------------------------------------------------------------

<S>                  <C>             <C>                <C>                <C>

Andrew L. Simon,
President, Chief
Executive Officer
and Chief Financial
Officer                   23,434(3)       $165,127          135,791/50,000    $862,273/$317,500(2)
--------------------------------------------------------------------------------------------------
Michael D. Beck,
Sr. Vice President,
TASA; President and
Chief Executive
Officer, BETA                 --                --           63,500/20,000    $403,225/$127,000(2)
--------------------------------------------------------------------------------------------------
Linda G. Straley,
Sr. Vice President and
Secretary, TASA            1,875          $  5,625           72,675/15,000    $461,486/$95,250(2)
--------------------------------------------------------------------------------------------------
Martin Borg,
President, ADI                --                --           40,000/0         $254,000/0(2)
--------------------------------------------------------------------------------------------------
Anne H. Cheevers,
Senior Vice President,
TASA (employment will
cease February 2007)           0                0            40,000/0         $254,000/0(2)
--------------------------------------------------------------------------------------------------
James J. Williams,
Chief Financial
Officer, TASA                  0                0            0/50,000         0/$317,500(2)
--------------------------------------------------------------------------------------------------
</TABLE>


(1)     To date, the Company has issued no SARs.  Amounts are
        calculated net of exercise price of the options.

(2)     Based on the closing price of the Company's Common Stock on
        NASDAQ on October 31, 2006, of $6.35.

(3)     In an exception to the compensation committee's normal practice,
        it allowed the option holder to exercise 55,459.50 options on a
        cashless basis resulting in 21,559 shares outstanding after the
        exercise. This is the only cashless exercise that the compensation
        committee has ever allowed under this plan. Mr. Simon also exercised
        1,875 options with cash consideration of $5,625.

DIRECTORS COMPENSATION

        The Board of Directors of the Company adopted the Directors
Plan in February 1996 in order to aid the Company in attracting,
retaining and motivating independent directors, which Directors
Plan was approved by the stockholders of the Company on March 29,
1996.  The Directors Plan initially authorized awards up to an
aggregate of 25,000 shares of Common Stock.  In February 2000, the
Board of Directors approved an amendment to the Directors Plan
increasing to 75,000 the number of shares which may be the subject
of stock options under the Directors Plan.  The stockholders of the
Company approved such amendment at the Annual Meeting of
Stockholders on March 31, 2000.  At the Annual Meeting of
Stockholders held on April 29, 2005, the stockholders approved
amendments to the Directors Plan to increase by 75,000 the number
of shares eligible to be issued pursuant to the Directors Plan and
to extend the expiration date of the Directors Plan from March 2006
to April 30, 2010.  Under the Directors Plan, non-qualified stock
options to purchase up to 150,000 shares of Common Stock may be
granted to non-employee directors of the Company, which options are
granted automatically at the times and in the manner stated in the
Directors Plan.

        Subject to the terms of the Directors Plan, each non-employee
director receives 5,000 options on the day he (she) first is
elected to the Board of Directors, and 2,500 options on the date of
each annual meeting of the stockholders of the Company, provided he
(she) is re-elected to the Board of Directors.  The exercise price
of stock options granted under the Directors Plan is the fair
market value of the Company's Common Stock on the date of grant.
The options become exercisable after the first anniversary of the
date of grant and the term of the option cannot exceed ten years.
Effective for options granted under the Directors Plan in Fiscal
2006 and thereafter, such options will become exercisable in three
equal annual installments following the grant date.  On April 25,
2003, the Company granted 10,000 options under the Directors Plan;
on April 30, 2004, the Company granted 15,000 options under the
Directors Plan, on April 29, 2005, the Company granted 12,500
options under the Directors Plan and on April 27, 2006 the Company
granted 12,500 options under the Directors Plan.  In Fiscal 2006,
zero options under the Directors Plan were exercised.  As of
October 31, 2006, an aggregate of 78,750 options were outstanding
under the Directors Plan.

        Effective in Fiscal 2007 each independent Director will
receive, in addition to the annual stock option grant as prescribed
by the Directors Plan, a monetary compensation award of $2,500 each
fiscal quarter.

OTHER PLANS

        CONSULTANTS STOCK INCENTIVE PLAN.  In March 1997, the Board of
        --------------------------------
Directors of the Company adopted the Consultants Plan, pursuant to
which options to purchase up to 50,000 shares of Common Stock may
be granted to consultants to the Company. The Consultants Plan is
administered by the Board of Directors of the Company.  Subject to
the terms of the Consultants Plan, the Board is authorized to
select optionees and determine the number of shares covered by each
option and certain of its other terms.  In general, the exercise
price of stock options granted under the Consultants Plan is the
fair market value of the Company's Common Stock on the date of the
grant; however, the Board has the discretion to use another method
of valuation if it determines that such other valuation is
warranted.  In general, options become exercisable six months from
the date of grant, although the Board has discretion to set either
longer or shorter vesting periods.  The period within which any
stock option may be exercised cannot exceed ten years from the date
of grant.  If a consultant's association with the Company is
terminated prior to the end of its agreed term, all unexercised,
deferred and unpaid awards shall be canceled immediately, except in
the event of the Consultant's death or disability.  As of October
31, 2006, 7,500 options were outstanding under the Consultants
Plan.

        PROFIT SHARING PLAN. The Company has a qualified 401(k) Profit
        -------------------
Sharing Plan.  For fiscal years ended before November 1, 2000, the
401(k) Plan allowed eligible employees to contribute up to 15
percent (15%) of income through Company contributions and a salary
reduction mechanism.  Company contributions to the 401(k) Plan are
optional and accrue at the discretion of the Board of Directors.
Effective November 1, 2000, the Company amended the 401(k) Plan to
provide a matching component under the 401(k) Plan of up to five
percent (5%) of each eligible employee's compensation.  In
addition, the eligibility requirements were amended to provide that
an employee is not eligible until completing twelve months, or one
thousand hours, of employment, and may only enter the 401(k) Plan
at specified entry dates.

        MONEY PURCHASE PENSION PLAN.  In October 1991, the Company
        ---------------------------
adopted a Money Purchase Pension Plan, which has been qualified by
the Internal Revenue Service.  Under this Plan, for fiscal years
ended before November 1, 2000, the Company was required to make an
annual contribution to the Plan equal to ten percent (10%) of each
eligible employee's compensation.  Effective November 1, 2000, the
Company amended the Plan to exclude highly compensated employees
and to reduce the contribution to five percent (5%) of each
eligible employee's compensation.  In addition, the eligibility
requirements were amended so that an employee is not eligible until
completing twelve months, or one thousand hours, of employment, and
may only enter the Pension Plan at specified entry dates.

        QUESTAR EDUCATIONAL SYSTEMS, INC. RETIREMENT SAVINGS PLAN.  In
        ---------------------------------------------------------
connection with the acquisition of Questar in Fiscal 2006, the
Company assumed the existing employee's retirement plan. Questar
has a qualified 401(k) Profit Sharing Plan. The Company matches 100
percent of the first $250 of each employee's contributions, then 50
percent of contributions thereafter up to a maximum of $2,500 or
2.5 percent of employee earnings, whichever is reached first.
Eligibility requirements are a minimum of 18 years of age with at
least six months of service with the Company.

        For Fiscal 2006 and 2005, the Company's retirement costs
totaled $352,647 and $262,723, respectively.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

        Section 16(a) of the Securities Exchange Act of 1934 requires
the Company's directors, executive officers and persons who own
beneficially more than ten percent of the Company's outstanding
common stock to file with the SEC initial reports of beneficial
ownership and reports of changes in beneficial ownership of common
stock and other securities of the Company on Forms 3, 4 and 5, and
to furnish the Company with copies of all such forms they file.
Based on a review of copies of such reports received by the
Company, all of the Company's directors and officers timely filed
all reports required with respect to Fiscal 2006.

<PAGE>

ITEM 11   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
          MANAGEMENT

        The following table sets forth certain information regarding
the beneficial ownership of the Company's Common Stock, as of
February 28, 2007, by (i) each person who is known by the Company
to own beneficially more than 5% of the Company's outstanding
Common Stock; (ii) each of the Company's officers and directors;
and (iii) all officers and directors as a group.

        As of February 28, 2007, there were 3,011,561 shares of Common
Stock outstanding.  Each share of Common Stock is entitled to one
vote per share.


                                                   Shares of        Percent of
Name and Address of                              Common Stock      Common Stock
Beneficial Owners and                            Beneficially      Beneficially
Directors and Officers                              Owned             Owned
-------------------------------------------------------------------------------

5% Beneficial Owners:
--------------------

Cahill, Warnock Strategic                         592,849(1)            19.7%
Partners Fund, L.P.
c/o Cahill, Warnock & Co., LLC
500 East Pratt Street, Suite 1200
Baltimore, MD 21202
-------------------------------------------------------------------------------

Camden Partners Strategic Fund III, L.P.        1,600,167(2)            34.8%
c/o Camden Partners Strategic Manager, LLC
500 East Pratt Street, Suite 1200
Baltimore, MD 21202
-------------------------------------------------------------------------------

Midsouth Investor Fund L.P.                       215,000                7.1%
1776 Peachtree St., N.W. Suite 412 North
Atlanta, GA 30309
-------------------------------------------------------------------------------

Kevin Gruneich                                    185,600                6.2%
12 White Pine Canyon Road
Park City, UT 84060
-------------------------------------------------------------------------------

-------------------------------------------------------------------------------

Officers and Directors
----------------------

Michael D. Beck                                   198,875(3)             6.5%
4 Hardscrabble Heights
Brewster, NY 10509
-------------------------------------------------------------------------------
Steven R. Berger                                    9,375(4)               *
805 Third Avenue
New York, NY 10022
-------------------------------------------------------------------------------
Donald W. Hughes                                2,307,366(5)            49.2%
500 East Pratt Street, Suite 1200
Baltimore, Maryland 21202
-------------------------------------------------------------------------------
Theodore Naegeli                                   43,488(6)             1.4%
2905 West Service Road
Egan, MN 55121
-------------------------------------------------------------------------------
Chris L. Nguyen                                     7,500(7)               *
4204 St. Paul Street
Baltimore, Maryland  21218
-------------------------------------------------------------------------------
Andrew L. Simon                                   250,468(8)             8.0%
4 Hardscrabble Heights
Brewster, NY 10509
-------------------------------------------------------------------------------
Linda G. Straley                                  126,244(9)             4.1%
4 Hardscrabble Heights
Brewster, NY 10509
-------------------------------------------------------------------------------
Thomas G. Struzzieri                               22,500(10)              *
319 Main Street
Saugerties, NY  12477
-------------------------------------------------------------------------------
David L. Warnock                                2,309,241(11)           49.3%
500 East Pratt Street, Suite 1200
Baltimore, Maryland 21202
-------------------------------------------------------------------------------
James Williams                                          0(12)              *
4 Hardscrabble Heights
Brewster, NY 10509
-------------------------------------------------------------------------------
Officers and Directors as a                     2,982,691(13)           57.0%
Group (10 persons)
-------------------------------------------------------------------------------

________________
* Less than 1%


1     Excludes 32,850 shares owned by Strategic Associates, L.P.,
      an affiliate of Cahill, Warnock Strategic Partners Fund, L.P.
      (the "Fund"), but as to which the Fund disclaims beneficial
      ownership.  ("Strategic Associates"; together, with the Fund,
      the "Cahill, Warnock Entities").  Pursuant to the Investor
      Rights Agreement (the "Investor Rights Agreement") between the
      Company and the Cahill, Warnock Entities, the Company has agreed
      that so long as the Cahill, Warnock Entities own at least 50% of
      the shares issuable or issued pursuant to warrants held by the
      Cahill, Warnock Entities), the Cahill, Warnock Entities have the
      right to nominate two directors to the Board of Directors of the
      Company.  David L. Warnock and Donald W. Hughes are the two
      current directors who were nominated by the Cahill, Warnock
      Entities.  Pursuant to the Investor Rights Agreement, the
      directors and executive officers of the Company have agreed, at
      each meeting of stockholders for the purpose of electing
      directors, to cast their eligible votes in favor of the nominees
      of the Cahill, Warnock Entities. Edward L. Cahill, David L.
      Warnock and Donald W. Hughes are general partners of Cahill,
      Warnock Strategic Partners, L.P. ("Cahill, Warnock Partners"),
      the Fund's sole general partner, and the sole general partner of
      Strategic Associates.  Each of David L. Warnock and Donald W.
      Hughes is also a director of the Company (see footnotes 6 and 11
      to this table).

2     Includes 1,600,167 shares of Common Stock which are issuable
      upon conversion of 1,600,167 shares of Series A-1 Preferred
      Stock, subject to anti-dilution adjustments.  Excludes 66,650
      shares of Common Stock which are issuable upon conversion of
      66,650 shares of Series A-1 Preferred Stock owned by Camden
      Partners Strategic Fund III-A, L.P. ("Camden III-A"), an
      affiliate of Camden Partners Strategic Fund III, L.P. (the
      "Camden III"), but as to which Camden III disclaims beneficial
      ownership.  (Camden III and Camden III-A, the "Camden
      Entities").  David Warnock and Donald Hughes, who are directors
      of the Company, are each managers of Camden Partners Strategic
      Manager, LLC.  Each of David L. Warnock and Donald W. Hughes is
      also a director of the Company (see footnotes 6 and 11 to this
      table).

3     Includes (i) 42,000 shares which are owned jointly with
      Mr. Beck's wife, (ii) 9,375 shares owned by Mr. Beck's daughter,
      and (iii) 63,500 shares which Mr. Beck has the right to acquire
      upon the exercise of currently exercisable stock options or
      options that will become exercisable within 60 days.  Excludes:
      (i) 9,375 shares owned by Mr. Beck's wife, as to which Mr. Beck
      disclaims beneficial ownership, and (ii) 20,000 shares which are
      the subject of options which are not currently exercisable.

4     Includes 9,375 shares which Mr. Berger has the right to
      acquire upon the exercise of currently exercisable stock options
      or stock options which become exercisable within 60 days, and
      excludes 2,500 shares which are the subject of options that are
      not currently exercisable.

5     Includes  (i)  625,699 shares owned by the Cahill Warnock
      Entities, (ii) 1,666,667 shares of Common Stock issuable upon
      conversion of shares of Series A-1 Preferred Stock owned by the
      Camden Entities, and (iii) 15,000 shares which Mr. Hughes has
      the right to acquire upon the exercise of currently exercisable
      options or stock options which become exercisable within the
      next 60 days.  Excludes 2,500 shares which are the subject of
      options that are not currently exercisable.

 6    Includes 43,488 shares of Common Stock issuable upon
      conversion of shares of Series A-2 Preferred Stock.

 7    Includes 7,500 shares which Mr. Nguyen has the right to
      acquire upon the exercise of currently exercisable stock options
      or stock options which become exercisable within the next 60
      days.  Excludes 2,500 shares which are the subject of options
      that are not currently exercisable.

 8    Includes 135,791 shares which Mr. Simon has the right to
      acquire upon the exercise of currently exercisable stock options
      or stock options that will become exercisable within 60 days.
      Excludes: (i) 375 shares of Common Stock owned by the retirement
      account of Mr. Simon's wife, as to which Mr. Simon disclaims
      beneficial ownership, and (ii) 50,000 shares which are the
      subject of stock options that are not currently exercisable.

 9    Includes 73,675 shares which Ms. Straley has the right to
      acquire upon the exercise of currently exercisable stock options
      or options that will become exercisable within 60 days.
      Excludes 15,000 shares which are the subject of options that are
      not currently exercisable.

10    Includes 17,500 shares which Mr. Struzzieri has the right to
      acquire upon the exercise of currently exercisable stock options
      or options which become exercisable within the next 60 days.
      Excludes 2,500 shares which are the subject of options that are
      not currently exercisable.

11    Includes (i) 625,699 shares owned by the Cahill Warnock
      Entities, (ii) 1,666,667 shares of Common Stock issuable upon
      conversion of shares of Series A-1 Preferred Stock owned by the
      Camden Entities, and (iii) 10,000 shares which Mr. Warnock has
      the right to acquire upon the exercise of currently exercisable
      options or stock options which become exercisable within the
      next 60 days.  Excludes 2,500 shares which are the subject of
      options that are not currently exercisable.

12    Excludes 50,000 shares which are the subject of options that
      are not currently exercisable.

13    Includes 329,841 shares which officers and directors have
      the right to acquire upon the exercise of currently exercisable
      stock options or options which become exercisable within the
      next 60 days.  Includes shares beneficially owned by Messrs.
      Warnock and Hughes through the Camden Entities and the Cahill
      Warnock Entities.  Excludes 147,500 shares which are the subject
      of options that are not currently exercisable.


ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

CAHILL WARNOCK TRANSACTIONS.  In November 1998, the Company issued
---------------------------
and sold to the Cahill, Warnock Entities 8% Debentures due 2003
(the "Debentures"), in the aggregate principal amount of
$4,000,000, and as additional consideration for purchasing the
Debentures, Warrants to acquire shares of the Company's Common
Stock, which, on the closing date of such transaction, constituted
20% of the Company's issued and outstanding common stock on a fully
diluted basis.  The Debentures were repaid in Fiscal 2003, and a
portion of the Warrants held by the Cahill, Warnock Entities
expired at the end of Fiscal 2003. The Cahill Warnock Entities
exercised its remaining 138,047 warrants outstanding in December
2004 (after the end of Fiscal 2004), resulting in additional paid-
in capital to the Company of $155,303.  As of the date of this
Report, the Cahill Warnock Entities beneficially own 20.8% of the
Company's outstanding Common Stock, fully-diluted.

Pursuant to an investor rights agreement between the Company and
the Cahill, Warnock Entities, the Company has agreed that so long
as the Cahill, Warnock Entities own at least 50% of the shares
issued upon exercise of such Warrants, the Cahill, Warnock Entities
shall have the right to nominate two directors to the Board of
Directors of the Company.  David L. Warnock and Donald W. Hughes
are the current directors who were nominated by the Cahill, Warnock
Entities.  Pursuant to the Investor Rights Agreement, the directors
and executive officers have agreed, at each meeting of stockholders
for the purpose of electing directors, to cast their eligible votes
in favor of the nominees of the Cahill, Warnock Entities.

ACQUISITION OF AEC.  Pursuant to the acquisition of AEC in January
------------------
2005, the Company issued 12,000 shares of the Company's Common
Stock to the former stockholders of AEC in a transaction not
involving a public offering pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act.

ACQUISITION OF ADI.  Pursuant to the acquisition of ADI in July
------------------
2005, the Company issued 89,488 shares of the Company's Common
Stock to the former stockholders of ADI who had elected to receive
shares, in whole or in part in lieu of cash, in a transaction not
involving a public offering pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act. Martin
Borg, currently the President of ADI, received  68,119 of such
shares and options to acquire 40,000 shares of Common Stock, and
entered into an employment agreement with the Company.

CAMDEN ENTITIES TRANSACTIONS.  In connection with the acquisition
----------------------------
of Questar, the Company entered into a securities purchase
agreement the with Camden Entities, pursuant to which the Company
issued and sold to the Investors 1,666,667 shares of its Series A-1
Preferred Stock (valued at $7,500,000, based on a price of $4.50
per share). The proceeds from the sale of stock were used to pay a
portion of the purchase price for the shares of Questar and closing
costs for the transaction, with the balance being retained by the
Company for working capital.  The transaction did not involve a
public offering pursuant to the exemption from registration
provided by Section 4(2) of the Act.

Camden Partners Strategic Fund III, L.P. ("Camden III") is a
Delaware limited partnership formed in 2004.  It is a private
equity fund that invests in emerging micro-cap public and late
stage private companies, focusing on companies in the business and
financial services, education, and healthcare industries.  Camden
III is managed by its general partner, Camden Partners Strategic
III, LLC which, in turn, is managed by its managing member, Camden
Partners Strategic Manager, LLC.  David Warnock and Donald Hughes,
who are directors of the Company, are each managing members of
Camden Partners Strategic Manager, LLC.

Camden Partners Strategic Fund III-A, L.P. ("Camden III-A") is a
Delaware limited partnership formed in 2004.  It is a private
equity fund that invests in parallel with Camden III.  Camden III-A
is managed by its general partner, Camden Partners Strategic III,
LLC, which in turn is managed by its managing member, Camden
Partners Strategic Manager, LLC.

Cahill, Warnock Strategic Partners Fund, L.P. ("CW") and Strategic
Associates, L.P. ("SA") are stockholders of the Company and
affiliates of Camden III and Camden III-A.  David Warnock and
Donald Hughes, who are directors of the Company, are each managers
of Camden Partners Strategic Manager, LLC and general partners of
the general partner of CW and SA.  Mr. Warnock is President and Mr.
Hughes is Executive Vice President of Camden Partners Holdings,
LLC, which serves as a manager and advisor to Camden III, Camden
III-A, CW and SA.

As of the date of this Report, the Camden Entities beneficially own
36.9% of the Company's Common Stock on a fully-diluted basis.  The
entities controlled by Messrs. Warnock and Hughes - the Cahill
Warnock Entities and the Camden Entities - beneficially own an
aggregate of 46.9% of the Company's Common Stock on a fully diluted
basis.

ACQUISITION OF QUESTAR.  In the acquisition of Questar, the Company
----------------------
issued to the selling shareholders of Questar, 222,222 shares of
Series A-2 Preferred Stock (valued at $4.50 per share), as part
payment of the purchase price at closing and (b) delivered to the
escrow agent, 1,111,111 shares of the Series A-2 Preferred Stock
(valued at $4.50 per share), which will be deemed earned by, and
will be released to, the former shareholders of Questar if revenue
goals over the earn out period of the three fiscal years ending
October 31, 2007, 2008 and 2009, are met.  Such escrowed shares are
not deemed to be outstanding (and therefore, are not eligible to
vote) until the revenues goals are met and the shares are released
from escrow.  The issuance and sale of the Series A-2 Preferred
Stock did not involve a public offering pursuant to the exemption
from registration provided by Section 4(2) of the Act.  The Company
issued 222,222 shares of the Company's Series A-2 Preferred Stock
to the former shareholders of Questar who had elected to receive
shares, in whole or in part in lieu of cash, in a transaction not
involving a public offering pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act.

In consideration for his sale of shares of Questar, Mr. Naegeli,
who has since been elected a director of the Company, received
43,488 shares of Series A-2 Preferred Stock, which are convertible
into 43,488 shares of Common Stock of the Company, subject to anti-
dilution adjustments. Mr. Naegeli is also a shareholder in Questar
Data Systems ("QDS"). In connection with the acquisition of
Questar, the Company purchased, on a contractual basis, monthly
services from QDS for certain accounting and administrative
functions. The monthly fee for these services was $15,500 beginning
in June 2006. Total fees paid in Fiscal 2006 to QDS were $77,500.
The contract for services with QDS concluded in December 2006 with
no further obligations due from the Company.

As part of the acquisition of Questar, the Company entered in two
separate lease agreements with the former shareholders of Questar.
Through one lease agreement, the Company rents approximately 49,000
square-feet of office space in Apple Valley, Minnesota. The initial
term of this lease is for five years concluding on May 31, 2011
with the Company holding an option to renew for an additional five
-year period.  Pursuant to the second lease agreement the Company
uses 45,000 square-foot of distribution center also in Apple
Valley, Minnesota. This lease also concludes on May 31, 2011 with
the Company holding an option to renew for an additional five-year
period.  The Company also holds an option to lease an additional
11,000 square feet of distribution center space that is adjacent to
the current distribution center.

LEGAL FEES.  One of the Company's directors, Steven R. Berger, is a
----------
shareholder in Vedder, Price, Kaufman & Kammholz, P.C.  The Company
has retained Vedder, Price, Kaufman & Kammholz, P.C. as its special
securities counsel, and the Company paid an aggregate of $238,237
and $177,273 in legal fees and expense in Fiscal 2006 and Fiscal
2005, respectively.

APPROVAL OF DISINTERESTED MEMBERS OF THE BOARD.  The disinterested
----------------------------------------------
members of the Board of Directors of the Company discussed and
approved the transactions between the Company and the Investors,
and concluded that the terms of such transactions were no less
favorable to the Company than those that would otherwise have been
available to the Company from unrelated third parties.

ITEM 13.  EXHIBITS

        (b)  The following Exhibits are filed as part of this Report:

          3.1   Certificate of Incorporation, dated August
                22, 1991 filed with the Secretary of State
                of the State of Delaware (incorporated
                herein by reference to the exhibit
                contained in the Company's Quarterly Report
                on Form 10-QSB for the fiscal quarter ended
                January 31, 1999)

          3.2   Certificate of Merger dated August 26,
                1992, filed with the Secretary of State of
                the State of Delaware (incorporated herein
                by reference to the exhibit contained in
                the Company's Registration Statement on
                Form SB-2 under the Securities Act of 1933,
                as amended, filed with the Securities and
                Exchange Commission on July 7, 1993)

          3.3   Certificate of Amendment of Certificate of
                Incorporation dated March 4, 1999, filed
                with the Secretary of State of the State of
                Delaware (incorporated herein by reference
                to the exhibit contained in the Company's
                Quarterly Report on Form 10-QSB for the
                fiscal quarter ended January 31, 1999)

          3.4   Amended and Restated By-Laws (incorporated
                by reference to the exhibit contained in
                the Company's Registration Statement on
                Form S-3 (File No. 333-27659) under the
                Securities Act of 1933, as amended, filed
                with the Securities and Exchange Commission
                on May 22, 1997)

          3.5   Amended Certificate of Designations of
                Series A Convertible Preferred Stock filed
                with the Secretary of State of Delaware on
                May 25, 2006 (incorporated by reference to
                the exhibit contained in the Company's
                Current Report on Form 8-K, filed June 6,
                2006, as amended (the "June 2006 8-K")

          4.1   Specimen Certificate evidencing shares of
                Common Stock (incorporated herein by
                reference to the exhibit contained in the
                Company's Registration Statement on Form S-3
                (File No. 333-75377) under the Securities
                Act of 1933, as amended, filed with the
                Securities and Exchange Commission on March
                31, 1999)

          4.2   Investor Rights Agreement, dated as of
                September 4, 1998, by and among the
                Company, Cahill Warnock Strategic Partners
                Fund, L.P., Strategic Associates, L.P., and
                the Individual Shareholders Named Therein
                (incorporated by reference to the exhibit
                contained in the Company's Current Report
                on Form 8-K, which was filed with the
                Securities and Exchange Commission on
                November 23, 1998 (the "November 1998 8-K"))

          4.3   Registration Rights Agreement, dated as of
                September 4, 1998, by and among the
                Company, Cahill, Warnock Strategic Partners
                Fund, L.P., and Strategic Associates, L.P.
                (incorporated by reference to the exhibit
                contained in the November 1998 8-K)

          4.4   Voting Agreement, dated as of May 31, 2006,
                by and among Camden Partners Strategic Fund
                III, L.P., Camden Partners Strategic Fund
                III-A, L.P. and Touchstone Applied Science
                Associates, Inc. (incorporated by reference
                to the exhibit contained in the June 2006
                8-K)

          4.5   Investor Rights Agreement, dated as of May
                31, 2006, by and among Camden Partners
                Strategic Fund III, L.P., Camden Partners
                Strategic Fund III-A, L.P. and Touchstone
                Applied Science Associates, Inc.
                (incorporated by reference to the exhibit
                contained in the June 2006   8-K)

          4.6   Questar Investor Rights Agreement, dated as
                of May 31, 2006, by and among John Adams,
                David Ihle, Theodore Naegeli, Terry
                Appleman, Mark Budde, MaJeana Hallstrom,
                Greg Lindstrom and Susan Trent, and
                Touchstone Applied Science Associates, Inc.
                (incorporated by reference to the exhibit
                contained in the June 2006 8-K)

          4.7   Warrant Certificate issued to Signal Hill
                Capital Group, LLC dated May 31, 2006
                (incorporated by reference to the exhibit
                contained in the June 2006 8-K)


         10.1   Securities Purchase Agreement, dated as of
                September 4, 1998, by and among the
                Company, Cahill Warnock Strategic Partners
                Fund, L.P., and Strategic Associates, L.P.
                (incorporated by reference to the exhibit
                contained in the November 1998 8-K)

         10.2   Contract of Sale, dated as of January 31,
                2003, between the Company and 26 Palmer,
                LLC (incorporated by reference to the
                exhibit contained in the Company's
                Quarterly Report on Form 10-QSB for the
                fiscal quarter ended January 31, 2003)

         10.3   Agreement of Lease between the Company and
                26 Palmer, LLC (incorporated by reference
                to the exhibit contained in the Company's
                Quarterly Report on Form 10-QSB for the
                fiscal quarter ended January 31, 2003)

         10.4   Stock Purchase Agreement, dated as of
                January 1, 2005, by and between Pasquale J.
                DeVito, Ph.D. and Richard S. Zusman, Ed.D.,
                and Touchstone Applied Science Associates,
                Inc. (incorporated by reference to the
                exhibit contained in the Company's Current
                Report on Form 8-K, filed January 21, 2005)

         10.5   Stock Purchase Agreement, dated June 15,
                2005, by and among Martin Borg, Kevin
                Byrne, Karen Gerard, Brad Begley, Russell
                Leverenz, and Debbie Leverenz, and
                Touchstone Applied Science Associates, Inc.
                (incorporated by reference to the exhibit
                to the Company's Current Report on Form 8-K,
                filed June 20, 2005, as amended) (the "ADI 8-K")

         10.6   Stock Purchase Agreement, dated as of May
                31, 2006, by and among John Adams, David
                Ihle, Theodore Naegeli, Terry Appleman,
                Mark Budde, MaJeana Hallstrom, Greg
                Lindstrom and Susan Trent, and Touchstone
                Applied Science Associates, Inc.
                (incorporated by reference to the exhibit
                contained in the June 2006 8-K)

         10.7   Subordinated Note, dated May 31, 2006,
                issued by Touchstone Applied Science
                Associates, Inc. to Questar Data Systems,
                Inc., as paying agent for the selling
                shareholders of Questar Educational
                Systems, Inc. (incorporated by reference to
                the exhibit contained in the June 2006 8-K)

         10.8   Escrow Agreement, dated as of May 31, 2006,
                by and among John Adams, David Ihle,
                Theodore Naegeli, Terry Appleman, Mark
                Budde, MaJeana Hallstrom, Greg Lindstrom,
                Susan Trent, and Rider, Weiner & Frankel,
                P.C. and Touchstone Applied Science
                Associates, Inc. (incorporated by reference
                to the exhibit contained in the June 2006 8-K)

         10.9   Loan Agreement, dated as of May 31, 2006,
                by and among Touchstone Applied Science
                Associates, Inc., Questar Educational
                Systems, Inc. and TD Banknorth, N.A.
                (incorporated by reference to the exhibit
                contained in the June 2006 8-K)

         10.10  Security Agreement, dated as of May 31,
                2006, between Touchstone Applied Science
                Associates, Inc. and TD Banknorth, N.A.
                (incorporated by reference to the exhibit
                contained in the June 2006   8-K)

         10.11  Security Agreement, dated as of May 31,
                2006, between Questar Educational Systems,
                Inc. and TD Banknorth, N.A. (incorporated
                by reference to the exhibit contained in
                the June 2006 8-K)

         10.12  Series A Convertible Preferred Stock
                Purchase Agreement, dated as of May 31,
                2006, by and among Camden Partners
                Strategic Fund III, L.P., Camden Partners
                Strategic Fund III-A, L.P. and Touchstone
                Applied Science Associates, Inc.
                (incorporated by reference to the exhibit
                contained in the June 2006 8-K)

         10.13  Employment Agreement with Andrew L. Simon
                (incorporated herein by reference to the
                exhibit contained in the Company's
                Quarterly Report on Form 10-QSB for the
                fiscal quarter ended April 30, 1996)

         10.14  Employment Agreement with Linda G. Straley
                (incorporated herein by reference to the
                exhibit contained in the Company's
                Quarterly Report on Form 10-QSB for the
                fiscal quarter ended April 30, 1996)

         10.15  Employment Agreement, dated as of January
                2, 1997, between the Company and Michael D.
                Beck (incorporated by reference to the
                exhibit contained in the Company's
                Quarterly Report on Form 10-QSB for the
                fiscal quarter ended January 31, 1997)

         10.16  Employment Agreement, dated as of January
                1, 2005, between Assessment and Evaluation
                Concepts Inc. and Richard S. Zusman, Ed.D.
                (incorporated by reference to the exhibit
                contained in the AEC 8-K)

         10.17  Employment Agreement, dated as of January
                1, 2005, between Assessment and Evaluation
                Concepts Inc. and Pasquale J. DeVito, PH.D.
                (incorporated by reference to the exhibit
                contained in the AEC 8-K)

         10.18  Employment Agreement, dated as of July 1,
                2005, between Achievement Data, Inc. and
                Martin Borg (incorporated by reference to
                the exhibit contained in the AEC 8-K)

          21    Subsidiaries of the Company (filed herewith)

          23.1  Consent of Lazar, Levine & Felix LLP (filed herewith)

          23.2  Consent of McGladrey & Pullen, LLP (filed herewith)

          31    Certifications by Chief Executive Officer
                and Chief Financial Officer (filed herewith)

          32    Certifications by Chief Executive Officer
                and Chief Financial Officer pursuant to 18
                U.S.C. Section 1350, as adopted pursuant to
                Section 906 of the Sarbanes-Oxley Act of
                2002 (filed herewith)


ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

        In May 2006, the Audit Committee of the Board of Directors of
Touchstone Applied Science Associates, Inc. (the "Company")
authorized the Company to seek proposals from certified public
accounting firms to provide audit services for the fiscal year
ending October 31, 2006 and the interim period ending July 31,
2006. The Audit Committee decided to issue the request for proposal
because it wanted the opportunity to review firms in light of the
Company's then pending acquisition of Questar Education Systems,
Inc., which has its principal office in Minneapolis, MN.  Questar
was acquired by the Company in June 2006 and constitutes a
significant subsidiary of the Company. After the closing of the
acquisition of Questar, the Audit Committee of the Company reviewed
the proposals received from accounting firms, completed its due
diligence investigations and considered the benefits and detriments
of changing independent auditors. On July 26, 2006, the Audit
Committee notified Lazar Levine & Felix, LLP ("Lazar Levine"), of
its decision to dismiss Lazar Levine as the Company's independent
auditors.

        During each of the last two fiscal years of the Company, ended
October 31, 2005 and October 31, 2004, the reports of Lazar Levine
on the Company's financial statements did not contain an adverse
opinion or disclaimer of opinion, nor were such reports qualified
or modified as to uncertainty, audit scope or accounting
principles.

        The decision to change principal accountants was approved by
the Audit Committee of the Company's Board of Directors.

        During the two most recent fiscal years of the Company and any
subsequent interim periods, there were no disagreements between the
Company and Lazar Levine on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction
of Lazar Levine, would have caused it to make reference to the
subject matter of the disagreements in connection with its report.

        The Company has provided Lazar Levine with a copy of the above
disclosures in response to Item 304(a) of Regulation S-B in
conjunction with the filing of Form 8-K dated July 28 2006. The
Company requested that Lazar Levine deliver to the Company a letter
addressed to the Securities and Exchange Commission stating whether
it agrees with the statements made by the Company in response to
Item 304(a) of Regulation S-B, and if not, stating the respects in
which it does not agree. A copy of the letter of Lazar Levine is
filed as Exhibit 16.1 to the Form 8-K Current Report.

        On July 26, 2006, the Audit Committee notified McGladrey &
Pullen LLP ("McGladrey") that the Company had selected McGladrey as
the Company's independent registered public accountant for the
Company's fiscal year ending October 31, 2006 and the interim
period ended July 31, 2006, subject to the execution of a
definitive engagement letter. During the Company's two most recent
fiscal years or subsequent interim period, the Company has not
consulted with McGladrey regarding the application of accounting
principles to a specific transaction, either completed or proposed,
or the type of audit opinion that might be rendered on the
Company's financial statements, nor did McGladrey provide advice to
the Company, either written or oral, that was an important factor
considered by the Company in reaching a decision as to the
accounting, auditing or financial reporting issue. Further, during
the Company's two most recent fiscal years or subsequent interim
periods, the Company has not consulted with McGladrey on any matter
that was the subject of a disagreement or a reportable event.

        The following table shows the fees billed to us for the audit
and other services provided by Lazar Levine, McGladrey & Pullen,
LLP and RSM McGladrey, Inc. for the fiscal years 2006 and 2005


                                                  2006            2005
                                                  ----            ----

              Audit Fees                        $60,000        $124,710
              (Lazar Levine)
              Audit Fees                        176,000              --
              (McGladrey)
              Tax Fees                           18,000
                                               --------        --------
                                               $254,000        $124,710
                                               ========        ========

        AUDIT FEES. Audit fees consist of fees for professional
        ----------
services rendered for the audit of the consolidated financial
statements and the review of the consolidated financial statements
included in our quarterly reports and services normally provided by
the independent registered public accounting firm in connection
with statutory and regulatory filings or engagements.  For Lazar
Levine, audit fees in fiscal 2006 consisted of fees for the review
of the consolidated financial statements included in our 1st and 2nd
quarter reports.  For McGladrey, audit fees in fiscal 2006
consisted of services rendered for the audit of the consolidated
financial statements as of and for the year ending October 31, 2006
and the review of the consolidated financial statement included in
our 3rd quarter report.

        TAX FEES.  Tax related fees are principally for professional
        --------
services rendered for tax compliance, planning and reporting.

        AUDIT COMMITTEE POLICIES. The Audit Committee believes that,
        ------------------------
on the basis of the relevant facts and circumstances pertaining to
that firm's engagement by the Company, McGladrey and Lazar satisfy
the requirements for independence from the Company.  Consistent
with Sarbanes-Oxley and the SEC regulations promulgated there
under, the Audit Committee has established a policy to pre-approve
all audit and permissible non-audit services to be performed by the
Company's independent accountants.


<PAGE>

               INDEX TO CONSOLIDATED FINANCIAL STATEMENTS







                                                                   PAGE
                                                                   ----

REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS          F - 2/3

CONSOLIDATED BALANCE SHEETS                                        F - 4

CONSOLIDATED STATEMENTS OF INCOME                                  F - 6

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY         F - 8

CONSOLIDATED STATEMENTS OF CASH FLOWS                              F - 9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         F - 11



                                F-1
<PAGE>



          REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To The Board of Directors
Touchstone Applied Science Associates, Inc. and Subsidiaries
Brewster, NY


We have audited the accompanying consolidated balance sheet of
Touchstone Applied Science Associates, Inc. and Subsidiaries as of
October 31, 2006, and the related consolidated statements of income,
changes in stockholders' equity and cash flows for the year then
ended.  These consolidated financial statements are the responsibility
of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States).  Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation.  We believe that our audit
provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of Touchstone Applied Science Associates, Inc. and Subsidiaries as of
October 31, 2006 and the results of their operations and their cash
flows for the year then ended in conformity with U.S. generally
accepted accounting principles.

As described in Note 1 to the consolidated financial statements,
effective November 1, 2005, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 123(R), Share Based Payment.


McGladrey & Pullen, LLP
Minneapolis, Minnesota
March 12, 2007





                                F-2

<PAGE>





          REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To The Board of Directors
Touchstone Applied Science Associates, Inc. and Subsidiaries
Brewster, NY


We have audited the accompanying consolidated balance sheet of
Touchstone Applied Science Associates, Inc. and Subsidiaries as of
October 31, 2005, and the related consolidated statements of income,
changes in stockholders' equity and cash flows for the year then
ended.  These consolidated financial statements are the responsibility
of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States).  Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation.  We believe that our audit
provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of Touchstone Applied Science Associates, Inc. and Subsidiaries as of
October 31, 2005 and the results of its operations and its cash flows
for the year then ended in conformity with accounting principles
generally accepted in the United States of America.

As discussed in Note 1 to the Consolidated Financial Statements, the
accompanying 2005 financial statement has been restated.


Lazar Levine & Felix LLP
New York, New York
January 19, 2006
Except to Note 1 as to which the date is January 12, 2007


                                F-3

<PAGE>
                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES


<TABLE>
<CAPTION>
                       CONSOLIDATED BALANCE SHEETS
                        OCTOBER 31, 2006 and 2005



                                                             2006           2005
                                                             ----           ----
<S>
                                                    <C>             <C>
ASSETS
------

Current assets:
  Cash and temporary investments                        $   789,288      $ 1,289,630
  Restricted cash                                            20,307           20,347
  Accounts receivable, net of allowance for
   doubtful accounts of $33,000 and $3,000
   in 2006 and 2005, respectively                         8,611,587        2,886,915
  Inventories                                               545,362          467,762
  Prepaid expenses and other current assets                 496,509          397,420
  Deferred income taxes                                     364,031          571,417
                                                         ----------        ---------

      Total current assets                               10,827,084        5,633,491


Property and equipment - net of accumulated
  depreciation of $1,013,008 and $488,863
  in 2006 and 2005, respectively                          3,734,227          675,999


Other assets:
  Test passage bank and test development,
  net of accumulated amortization of $4,508,983
  and $3,579,751 in 2006 and 2005, respectively           2,335,670        2,750,239
  Non compete covenants, net of accumulated
  amortization of $44,000 in 2006                           315,659               --
  Customer contracts, net of accumulated
  amortization of $377,000 in 2006                        4,122,678               --
  Goodwill                                               13,647,586        1,969,542
  Deferred income taxes                                   1,325,379          596,623
  Other assets                                              349,832          252,931
                                                         ----------        ---------

      Total assets                                      $36,658,115      $11,878,825
                                                        ===========      ===========

</TABLE>







See notes to consolidated financial statements.



                                F-4

<PAGE>

                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

<TABLE>
<CAPTION>
                  CONSOLIDATED BALANCE SHEETS (Continued)
                       OCTOBER 31, 2006 and 2005

                                                             2006           2005
                                                             ----           ----
<S>
                                                    <C>             <C>
ASSETS
------

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------

Current liabilities:
  Revolving credit agreements                           $ 1,774,819         $     --
  Current maturities of long-term debt                    1,459,502          166,750
  Accounts payable                                        2,794,301          489,428
  Income tax payable                                        204,319               --
  Accrued expenses                                        1,996,161        1,687,829
  Other liabilities                                         470,490          317,529
  Deferred gain on sale of building -
   current portion                                          125,438          125,439
                                                        -----------        ---------

      Total current liabilities                           8,825,030        2,786,975


Long-term debt, less current portion                     12,405,735        1,396,212
Deferred gain on sale of building, net of
 current portion                                            710,817          836,255
Interest Rate Swap Devaluation                               77,155               --
                                                        -----------        ---------

      Total liabilities                                  22,018,737        5,019,442
                                                        -----------        ---------

Commitments and contingencies


Stockholders' equity:
  Preferred stock, $.0001 par value,
   5,000,000 shares authorized, issued and
   outstanding 1,888,888 in 2006                                189               --
  Common stock, $.0001 par value,
   20,000,000 shares authorized,
   2,946,047 and 2,909,738 shares issued
   and outstanding in 2006 and 2005,
   respectively                                                 295              291
  Additional paid-in capital                             15,069,034        6,164,387
  Retained earnings (deficit)                              (430,140)         694,705
                                                       ------------      -----------

      Total stockholders' equity                         14,639,378        6,859,383
                                                       ------------      -----------

Total liabilities and stockholders' equity              $36,658,115      $11,878,825
                                                       ============      ===========
</TABLE>




See notes to consolidated financial statements.

                                F-5
<PAGE>


                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

                    CONSOLIDATED STATEMENTS OF INCOME
                  YEARS ENDED OCTOBER 31, 2006 and 2005



                                               2006                2005
                                               ----                ----

Net revenue earned                         $23,686,213         $11,686,649

Cost of goods sold
  Cost of revenue earned                    13,305,528           5,990,327
  Impairment charges related to:
    Development costs                          610,588                  --
    Inventory                                  137,092                  --
                                           -----------         -----------
Total Cost of goods sold                    14,053,208           5,990,327
                                           -----------         -----------


Gross profit                                 9,633,005           5,696,322
                                           -----------         -----------

Operating expenses:
  Selling                                    1,801,973           1,432,287
  General and administrative                 8,719,497           3,637,098
                                           -----------         -----------

Total operating expenses                    10,521,470           5,069,385
                                           -----------         -----------

Income (loss) from operations                (888,465)             626,937


Other income (expense):
  Gain on sale/leaseback of building           125,439             125,439
  Interest income                                2,538              20,347
  Interest expense                            (613,149)            (44,416)
                                           -----------         -----------

Income (loss) before income taxes           (1,373,637)            728,307


Income Tax Provision (benefit)                (248,792)            295,778
                                           -----------         -----------

Net Income (loss)                        $  (1,124,845)        $   432,529
                                         =============         ===========






See notes to consolidated financial statements.


                                F-6
<PAGE>

                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF INCOME (Continued)
                    YEAR ENDED OCTOBER 31, 2006 and 2005






                                                 2006              2005
                                                 ----              ----

Weighted average number
of common and
convertible preferred
shares outstanding:
  Basic                                      4,802,835           2,807,275
  Diluted                                    4,802,835           3,023,262


Earnings (loss) per share:
  Basic                                    $     ( .23)         $      .15
  Diluted                                  $     ( .23)         $      .14






See notes to consolidated financial statements.


                                F-7
<PAGE>


                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

<TABLE>
<CAPTION>

         CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY




                                                                            Additional                       Retained
                                   Preferred Stock         Common Stock       Paid-in      Subscriptions     Earnings
                                 Shares      Amount     Shares      Amount    Capital      Receivable        (Deficit)
                                 ------      ------     ------      ------    -------      -------------     ---------


<S>                             <C>       <C>        <C>            <C>       <C>           <C>           <C>


Balance at October 31, 2004          --          --       2,627,703     263     5,609,480        (920)          262,176


Exercise of employee
stock options                        --          --          42,500       4        28,986          --                --
Stock subscription
received                             --          --              --      --            --         920                --
Issuance of common
stock in connection
with the acquisition
of AEC                               --          --          12,000       1        38,999          --                --
Issuance of common
stock in connection
with the acquisition
of ADI                               --          --          89,488       9       331,633          --                --
Exercise of warrants                 --          --         138,047      14       155,289          --                --
Net Income                           --          --              --      --            --          --           432,529
                                   ----        ----      ----------     ---     ---------        ----           -------

Balance at October 31, 2005          --          --       2,909,738     291     6,164,387          --           694,705

Exercise of employee
stock options                        --          --          36,309       4        94,750          --                --
Issuance of preferred
stock in connection
with the acquisition
of Questar                    1,888,888         189              --      --      8,499,811         --                --
Exercise of warrants                 --          --              --      --        112,072         --                --
Stock Option Expense                 --          --              --      --        198,014         --                --
Net Loss                             --          --              --      --             --         --         (1,124,845)


Balance at October 31, 2006   1,888,888        $189       2,946,047    $295    $15,069,034        $--          $(430,140)
                              =========        ====      ==========    ====     ---------        ====         ==========
</TABLE>

See notes to consolidated financial statements.

                                F-8

<PAGE>

                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                FOR THE YEARS ENDED OCTOBER 31, 2006 and 2005



                                               2006                2005
                                               ----                ----



OPERATING ACTIVITIES
Net income (loss)                          $(1,124,845)        $   432,529
Adjustments to reconcile net income
(loss) to net Cash provided by (used
in) operating activities:
  Depreciation and amortization              2,189,990             679,008
  Deferred income taxes                       (521,370)            251,728
  Bad debt expense                                  --              (1,732)
  Gain on sale/leaseback of building          (125,439)           (125,439)
  Stock option expense                         198,014                  --
  Interest swap agreement devaluation           77,155                  --
Non-cash issuance of warrants for services     112,072                  --
Changes in operating assets and liabilities,
net of the affects of the acquisition of
Questar in 2006 and ADI and AEC in 2005:
  Accounts receivable                       (2,291,761)         (1,219,977)
  Inventories                                  (77,600)            (36,566)
  Restricted Cash                                   40               1,607
  Prepaid expenses and other current assets      1,502             (56,421)
  Deferred Revenue                             152,961             255,213
  Accounts payable and accrued expenses      1,200,152             370,625
                                             ---------           ---------


CASH PROVIDED BY (USED IN)
 OPERATING ACTIVITIES                         (209,129)            550,575
                                             ---------           ---------

INVESTING ACTIVITIES
  Purchase of property and equipment          (592,843)           (270,279)
  Test passage bank and test development      (597,603)           (928,048)
  Cash and fees paid to acquire
    stock of Questar Educational
    Systems, Inc.                          (14,583,302)                 --
  Cash and fees paid to acquire stock of
    Achievement Data, Inc. ("ADI")                  --          (1,318,350)
  Cash and fees paid to acquire stock of
    Assessment and Evaluation Concepts, Inc.
    ("AEC")                                         --             (83,000)
  Software development costs                   (28,030)                 --
  Other Assets                                 (18,613)                 --
                                             ---------           ---------


CASH USED IN INVESTING ACTIVITIES          (15,820,391)         (2,599,677)
                                            ----------           ---------





See notes to consolidated financial statements.

                                F-9


<PAGE>

                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

<TABLE>
<CAPTION>
              CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
                FOR THE YEARS ENDED OCTOBER 31, 2006 and 2005




                                                    2006                  2005
                                                    ----                  ----
<S>                                           <C>                 <C>

FINANCING ACTIVITIES
  Repayment of long-term debt                    (3,157,627)            (37,417)
  Proceeds from long-term debt                    9,600,000           1,451,482
  Net borrowings on revolving
   credit agreements                              1,774,819                  --
  Costs associated with obtaining
   long-term debt                                  (282,768)            (12,033)
  Proceeds from the exercise of
   employee stock options                            94,754              28,990
  Proceeds from the exercise of
   warrants                                              --             155,303
  Proceeds from issuance of
   preferred stock                                7,500,000                  --
  Stock subscriptions received                           --                 920


CASH FLOWS FROM FINANCING ACTIVITIES             15,529,178           1,587,245
                                                 ----------           ---------

NET DECREASE IN CASH AND CASH EQUIVALENTS          (500,342)           (461,857)


CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR    1,289,630           1,751,487
                                                 ----------           ---------

CASH AND CASH EQUIVALENTS AT END OF YEAR           $789,288          $1,289,630
                                                ===========          ==========

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:

Interest                                        $   466,649          $   35,234
                                                ===========          ==========
Income taxes                                    $   180,913          $    7,683
                                                ===========          ==========

Non-cash investing and financing activities:
Stock issued in acquisition of AEC              $        --          $   39,000
                                                ===========          ==========
Stock issued in acquisition of ADI              $        --          $  331,642
                                                ===========          ==========
Note payable issued in acquisition of Questar   $ 4,000,000          $       --
                                                ===========          ==========
Stock issued in acquisition of Questar          $ 1,000,000          $       --
                                                ===========          ==========
See Note 2 for non-cash aspects
  of acquisitions

</TABLE









See notes to consolidated financial statements.

                                F-10

<PAGE>
                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------------

Organization
------------

Touchstone Applied Science Associates, Inc. (the "Company" or
"TASA") competes exclusively in the assessment marketplace.
With the advent of No Child Left Behind legislation ("NCLB"),
the Company's Board of Directors and management made the
strategic decision to focus the organization on the fast-growing
assessment segment of the K-12 education market. The Company
competes in both the custom and proprietary product lines of the
assessment marketplace.  Over the past decade, this market has
been moving towards custom testing as a result of NCLB
legislation requiring that student success be measured against
specific standards established by each individual state.  The
Company has recognized this trend and has aligned its long term
and short term strategic initiatives and resources to take
advantage of these changes in the market. During the fiscal year
ended October 31, 2006 ("Fiscal 2006"), the Company decided to
minimize its efforts in growing its proprietary products
business, and to devote significant resources to expanding its
custom testing services. The Company implemented this strategy
by acquiring all the outstanding stock of Questar Educational
Systems, Inc. ("Questar") in May 2006. Questar provides test
delivery, scoring, and score analysis capabilities for state
testing programs.  In addition to the Questar acquisition, the
Company had previously acquired all the outstanding stock of
both Assessment and Evaluation Concepts, Inc. ("AEC") and
Achievement Data, Inc. ("ADI") in January 2005 and July 2005
respectively.  AEC provides professional consulting services in
the areas of program evaluation, student assessment,
professional development and data collection and reporting to
state, federal and higher education institutions as well as
private companies. ADI provides on-line testing capabilities to
state testing programs and also offers an electronic testing
engine.

The Company operates through different subsidiaries, but
management believes that all such subsidiaries constitute a
single operating segment since the subsidiaries have similar
economic characteristics.


Principles of Consolidation and Basis of Presentation
-----------------------------------------------------

The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant
inter-company accounts and transactions have been eliminated in
consolidation.

Restatement
-----------

The audited consolidated financial statements included in this
Report for the Company's fiscal year ended October 31, 2005 has
been restated and supersede the Company's previously-issued
audited consolidated financial statements for such fiscal year.

Subsequent to the issuance of the Company's audited consolidated
financial statements in its Form 10-KSB for the fiscal years ended
October 31, 2005 and 2004 the Company concluded that it had
previously omitted an accrued liability recognizing the effect of
its employee's earned but unused vacation and that such omission
was not consistent with generally accepted accounting principles.
The Company concluded that it was necessary to restate such
financial statements. The restatement does not affect previously
reported revenues for the restated period or future periods.

                                F-11

<PAGE>

                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
---------------------------------------------------------


     A summary of the significant effects of the restatement is as
follows:
<TABLE>
<CAPTION>

                                         As Previously
                                         Reported                       Restated      Restated
                                         2005             2004          2005          2004
                                         ----             ----          ----          ----

<S>                                  <C>             <C>             <C>          <C>
As of October 31,
-----------------

Accrued employee vacation                $      0        $       0      $259,866     $ 189,141
Retained earnings                         850,625          375,661       694,705       262,176

For the fiscal year ended October 31,
-------------------------------------

Income before income taxes                799,032         1,415,051      728,307     1,381,449
Income taxes                              324,068           592,448      295,778       579,008
Income from continuing operations         474,964           822,603      432,529       802,441
Net Income                                474,964           822,603      432,529       802,441
Net Income per common share
     Basic (from continuing operations)       .17               .31          .15           .31
     Diluted (from continuing operations)     .16               .29          .14           .28
</TABLE>

Goodwill
--------

Goodwill is not amortized but is subject to annual impairment
tests at least annually.  The Company also reviews the carrying
amount of goodwill for impairment if an event occurs or
circumstances change that would indicate the carrying amount
may be impaired.  The Company performed the annual tests at
October 31, 2006 and 2005, and has determined there to be no
impairment of the goodwill on those dates.  The net carrying
value of goodwill at October 31, 2006 and 2005 was $13,647,586
and $1,969,542, respectively.


                                F-12

<PAGE>


                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
---------------------------------------------------------

Cash and Cash Equivalents
-------------------------

Cash and cash equivalents include all cash balances on hand and
short-term, highly liquid investments with original maturities
of three months or less. The Company maintains its cash in bank
accounts, which at times, exceed federally insured limits. The
Company has not experienced any losses in such accounts.


Accounts Receivable and Allowance of Doubtful Accounts
------------------------------------------------------

Accounts receivable are carried at original invoice amount less
an estimate made for doubtful receivables based on a review of
all outstanding amounts on a quarterly basis. Management
determines the allowance for doubtful accounts by regularly
evaluating individual customer receivables and considering a
customer's financial condition and credit history, and current
economic conditions. Accounts receivable are written off when
deemed uncollectible.  Recoveries of accounts receivable
previously written off are recorded when received.

Accounts receivable consists of the following:


                                                       October 31,
                                                       -----------
                                                  2006             2005
                                                  ----             ----



          Billed                              $8,611,587       $2,559,630
          Unbilled (costs in
          excess of billings)                         --          327,285
                                              ----------       ----------

                                              $8,611,587       $2,886,915
                                              ==========       ==========
Inventories
-----------

Inventories based on the nature of the Company's operations
consist solely of finished goods.  These are stated at the lower
of cost (first-in, first-out method) or market.  At October 31,
2006, the Company appropriately provided inventory reserves of
$161,000 regarding impaired projects and other un-saleable
inventory. The current year affect of these reserves have been
reflected as a separate component of Cost of Goods Sold.


Property and Equipment
----------------------

Property and equipment are stated at cost.  The Company provides
for depreciation generally on an accelerated method (double-
declining balance) for personal property and on a straight line
method for real property, by charges to income at rates based
upon estimated recovery periods as follows:

      Leasehold improvements                10 years (shorter of lease
                                            term or useful life)
      Furniture, fixtures and equipment     5 to 7 years

                                F-13

<PAGE>



                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
---------------------------------------------------------


Income Taxes
------------

Income taxes are reported based upon Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes".  (Note 10).  The Company files a consolidated Federal
income tax return with its subsidiaries. Deferred taxes are
provided on an asset and liability method whereby deferred tax
assets are recognized for deductible temporary differences and
operating loss and tax credit carry forwards, and deferred tax
liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax basis. Deferred
tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more than likely than not that some
portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects
of changes in the tax laws and rates on the date of enactment.








                                F-14

<PAGE>

                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
---------------------------------------------------------

Intangible Assets and Deferred Charges
--------------------------------------

Software Development
--------------------

The Company accounts for costs associated with the development
of software products pursuant to SFAS No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed".  Pursuant to these rules for product development,
the work performed prior to the determination of technological
feasibility is treated as research and development costs and is
expensed as incurred.  From the point a project attains
technological feasibility until it is ready for sale, the
payroll and payroll-related charges and any direct material
costs are capitalized.  Capitalization of computer software
costs is discontinued when the product is available to be sold.

As of October 31, 2006 and 2005 unamortized software development
costs totaled $69,763 and $60,243 respectively, and were
included as a component of other assets within the Company's
consolidated balance sheets.


Test Passage Bank and Test Development
--------------------------------------

The test passage bank is principally comprised of payroll and
payroll-related costs as well as freelance consulting costs
expended in the development of test passages which are used in
the creation of the Company's tests.  The process of writing
and calibrating a test passage takes approximately two years,
and all costs associated with the process in the cost of
production of each test passage and the cost of calibration of
each test passage are direct costs and are capitalized during
this period. Amortization of these costs begins once the
development period has elapsed, which in most cases, represents
the point in time at which the new test passage is placed into
the test passage bank and becomes available to be utilized
within the Company's existing tests, or the point in time at
which a newly developed test becomes available for sale.  Costs
capitalized in connection with the development of passages used
in the Company's Degrees of Reading Power Test ("DRP") have
been estimated to have a useful life of eleven years and,
accordingly, are being amortized over an eleven-year period.
Costs capitalized in connection with the development of
passages used in all other of the Company's tests have been
estimated to have a useful life of seven years and,
accordingly, are being amortized over a seven-year period.

During the fourth quarter of 2006, and after assessing full
year revenue results, the Company made the strategic decision
to eliminate certain proprietary products, which performed
below management's expectations.  These decisions lead to
impairment charge of $610,588 related to proprietary products
which were discontinued or adjusted to the lower of cost of
market.  This impairment charge is included as a separate
component of Cost of Goods Sold.

Customer Contracts and Non Compete Covenants
--------------------------------------------

The Company has recognized and recorded the value in certain
intangible assets acquired from Questar in May 2006.  The value of
these assets was independently reviewed by third party appraisers
hired by the Company.  The Non Compete Covenants represent
agreements between the Company and certain current and former
employees of the Company.  The agreements stipulate that these
employees will not, for a period of time as outlined within the
agreement, engage in employment activities that will directly or
indirectly compete with the Company's business operations. The
agreements are due to expire on October 31, 2009. The intangible
asset value assigned to these agreements represents their fair
value $360,000 as of May 31, 2006.

                                F-15

<PAGE>

                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
---------------------------------------------------------

The Company has additionally recognized and recorded in connection
with the Questar acquisition intangible value for certain customer
contracts.  These contracts are agreements with multiple state
entities to perform test construction, distribution, scoring and
reporting services.  The contracts have various lives that are due
to expire over the next one - five fiscal years.  The Company has
valued these contracts based their total expected discounted cash
flow $4,500,000 as of May 31, 2006.


Amortization
------------

Certain capitalized costs are amortized using the straight-line
method over a period of five (5) years for software development
and seven to eleven (7-11) years for test passage bank and test
development costs.  Loan origination costs are being amortized
over the term of the indebtedness.  As of October 31, 2006,
unamortized loan origination costs totaled $259,204 and are
included in other assets.  Non -compete covenants are amortized
over the life of the agreement of approximately 3 1/2 years. As
of October 31, 2006 unamortized non-compete covenants totaled
$315,659. Customer contracts are amortized over their expected
lives of 1 to 4 years, in proportion to the annual discounted
cash flow the Company expects to receive by performing the
contractual services as defined by each contract.  As of
October 31, 2006 unamortized customer contracts totaled
$4,122,678. Total amortization expense was $1,665,845and
$491,142 for the fiscal years ended October 31, 2006 and 2005
respectively. Amortization expense for fiscal year ended
October 31, 2006 included the write down of $610,588 of
deferred costs applicable to non-performing products.


Estimated annual amortization expense for the next five years
ending October 31, is as follows:


      2007              $2,988,000
      2008              $1,366,000
      2009                $885,000
      2010                $540,000
      2011                $240,000

                                F-16

<PAGE>

                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
---------------------------------------------------------

Other Liabilities
-----------------

As of October 31, 2006, other liabilities consist of billings in
excess of costs of $470,490.  As of October 31, 2005, other
liabilities consist of a customer advance of $294,608 and
billings in excess of costs of $22,921.

Accrued Expenses
----------------

Accrued expenses consist of the following:


                                                       October 31,
                                                       -----------
                                                  2006             2005
                                                  ----             ----



      Compensation                            $1,080,174      $  445,565
      Benefit Plans                              352,647         262,723
      Interest                                   155,681              --
      Other                                      407,659         979,541
                                              ----------      ----------

                                              $1,996,161      $1,687,829
                                              ==========      ==========


Concentration of Credit Risk
----------------------------

Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and
temporary investments and accounts receivable.  The Company
maintains substantially all its cash balances and temporary
investments in a limited number of financial institutions.  The
balances are insured by the Federal Deposit Insurance
Corporation up to $100,000.  At October 31, 2006 and 2005, the
Company's uninsured cash balances and temporary investments
totaled $611,780 and $1,102,081, respectively.  The Company
performs periodic reviews of the relative credit rating of its
banks to lower its risk.  The Company believes that
concentration with regards to accounts receivable is limited
due to its large customer base.


Revenue Recognition
-------------------

Revenues from the Company's sales of its proprietary tests,
including sales of their related ancillary materials and
performance of scoring services are recognized when the
Company ships the physical product from its warehouse or when
the revenues have been realized or become realizable and have




                                F-17

<PAGE>


                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
---------------------------------------------------------

been earned pursuant to Staff Accounting Bulletin No. 104,
"Revenue Recognition".  Shipping charges are included in
revenue in the accompanying consolidated statements of income.

The Company's revenues from the performance of assessment,
consulting and psychometric services under long term contracts
are recognized on the percentage of completion basis pursuant
to the provisions of Statement of Position No. 81-1,
"Accounting for Performance of Construction-type and Certain
Production-type Contracts" and Accounting Research Bulletin
("ARB") No. 45, "Long-term Construction-type Contracts".  For
each contract, the Company compares the costs incurred in the
course of performing such contract during a reporting period
to the total estimated costs of full performance of the
contract and recognizes a proportionate amount of revenue for
such period.  In addition, the Company records revenue from
software pursuant to the provisions of Statement of Position
No. 97-2, "Software Revenue Recognition", and in the Statement
of Position No. 98-9, "Modification of SOP 97-2, Software
Revenue Recognition With Respect to Certain Transactions".

Rights of Return
----------------

There is a right of return on test booklets, answer sheets and
certain software products. Upon return within a specified
period, a credit is issued, with certain charge offs, or, in the
case of software products, the item is replaced.  Historically,
the Company's returns have been insignificant.  As a result, no
return reserve has been provided for at October 31, 2006 and
2005.

Use of Estimates
----------------

The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
make disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues
and expenses during the reporting period.  Actual results could
differ from those estimates.

Fair Value
----------

The Company has a number of financial instruments, none of which
is held for trading purposes.  The carrying value of cash and
cash equivalents, accounts receivable, accounts payable and
accrued expenses approximate their fair value because of the
short-term nature of these financial instruments. The carrying
value of long-term debt approximates fair value as the rate of
interest on the debt approximates the market rate of interest as
of October 31, 2006 and 2005.  Considerable judgment is
necessarily required in interpreting market data to develop the
estimates of fair value, and accordingly, the estimates are not
necessarily indicative of the amounts that the Company could
realize in a current market exchange.


                                F-18

<PAGE>

                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
---------------------------------------------------------

Long-Lived Assets
-----------------

Long-lived assets at October 31, 2006 and 2005 consist of
property, plant and equipment and intangible assets. The
Company reviews its long-lived assets for impairment whenever
events or business circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the
carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.


Stock Based Compensation
------------------------

The Company has a 2000 Stock Option Plan (the "Plan"). Effective
November 1, 2005, the Company's Plan is accounted for in
accordance with the recognition and measurement provisions of
Statement of Financial Accounting Standards ("FAS") No. 123
(revised 2004), Share-Based Payment ("FAS No. 123(R)"), which
replaces FAS No. 123, Accounting for Stock-Based Compensation,
and supersedes Accounting Principles Board Opinion ("APB") No.
25, Accounting for Stock Issued to Employees, and related
interpretations. FAS No. 123(R) requires compensation costs
related to share-based payment transactions, including employee
stock options, to be recognized in the financial statements. In
addition, the Company adheres to the guidance set forth within
Securities and Exchange Commission ("SEC") Staff Accounting
Bulletin ("SAB") No. 107, which provides the Staff's views
regarding the interaction between SFAS No. 123(R) and certain SEC
rules and regulations and provides interpretations with respect
to the valuation of share-based payments for public companies.

Prior to November 1, 2005, the Company accounted for similar
transactions in accordance with APB No. 25 which employed the
intrinsic value method of measuring compensation cost.
Accordingly, compensation expense was not recognized for fixed
stock options if the exercise price of the option equaled or
exceeded the fair value of the underlying stock at the grant
date.

While FAS No. 123 encouraged recognition of the fair value of all
stock-based awards on the date of grant as expense over the
vesting period, companies were permitted to continue to apply the
intrinsic value-based method of accounting prescribed by APB No.
25 and disclose certain pro-forma amounts as if the fair value
approach of FAS No. 123 had been applied.  In December 2002, FAS
No. 148, Accounting for Stock-Based Compensation-Transition and
Disclosure, an amendment of FAS No. 123, was issued, which, in
addition to providing alternative methods of transition for a
voluntary change to the fair value method of accounting for
stock-based employee compensation, required more prominent pro-
forma disclosures in both the annual and interim financial
statements. The Company complied with these disclosure
requirements for all applicable periods prior to November 1, 2005.

In adopting FAS No. 123(R), the Company applied the modified
prospective approach to transition. Under the modified
prospective approach, the provisions of FAS No. 123(R) are to be
applied to new awards and to awards modified, repurchased, or
cancelled after the required effective date. Additionally,
compensation cost for the portion of awards for which the
requisite service has not been rendered that are outstanding as
of the required effective date shall be recognized as the
requisite service is rendered on or after the required effective
date. The compensation cost for that portion of awards shall be
based on the grant-date fair value of those awards as calculated
for either recognition or pro-forma disclosures under FAS 123.


                                F-19

<PAGE>
                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
---------------------------------------------------------

As a result of the adoption of FAS No. 123(R), the Company's
results for the fiscal year end October 31, 2006 include stock
option compensation expense totaling $198,014. Such amount has
been included in the Consolidated Statements of Income within
general and administrative expenses.  The Company recognized
related tax benefits associated with share-based compensation
arrangements totaling approximately $82,000 during the fiscal
year end October 31, 2006.  The impact of the adoption is an
increase in loss before tax and net loss for fiscal year end
October 31, 2006 of $198,014 and $116,014, respectively.  In
addition, basic and diluted net loss per share is increased by
approximately $0.02.  There was no impact on cash flows from
operations and cash flows from financing activities.  Stock
option compensation expense calculated and disclosed under APB
No. 25 in the Notes to the Consolidated Statements of Operations
for fiscal year ended October 31, 2005 totaled $290,650.
Stock option compensation expense in 2006 is the estimated fair
value of options granted during fiscal 2006 and the remaining
portion of any unvested and outstanding options granted prior to
fiscal 2006, amortized on a straight-line basis over the
requisite service period for the entire portion of the award.
The weighted average estimated fair value of stock options
granted for fiscal year ended October 31, 2005 was $3.75.  The
fair value of options at the date of grant was estimated using
the Black-Scholes option pricing model. During 2006, the Company
took into consideration guidance under FAS No. 123(R) and SEC
Staff Accounting Bulletin No. 107 (SAB 107) when reviewing and
updating assumptions. The expected volatility is based upon
historical volatility of our stock and other contributing
factors. The expected term is based upon observation of actual
time elapsed between date of grant and exercise of options for
all employees.  Previously such assumptions were determined based
on historical data.

The assumptions made in calculating the fair values of
options are as follows:


                                                Year Ended
                                      October 31, 2006       October 31, 2005
                                      ----------------       ----------------

      Expected term (in years)                10                     10
      Expected volatility                    125%                   121%
      Expected dividend yield                  0%                     0%
      Risk-free interest rate               4.88%                  4.23%



The following table addresses the additional disclosure
requirements of FAS No. 123(R) in the period of adoption.
The table illustrates the effect on net income and income
per share as if the fair value recognition provisions of FAS
No. 123(R) had been applied to all outstanding and unvested
employee awards in the prior period:





                                F-20

<PAGE>


                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
---------------------------------------------------------







                                                                  For the Year
                                                                     Ended
                                                               October 31, 2005
                                                               ----------------

Net income attributable to common stockholders, as reported         $432,529

Add: Stock-based compensation included in report net income               --
Deduct: Total stock based compensation expense determined
under the fair value based method for all awards, net of tax         290,650
                                                                    --------
Pro forma net income attributable to common stockholders            $141,879
                                                                    ========
Net income per share:
Basic net income per share - as reported                               $0.15
Diluted net income per share - as reported                             $0.14

Basic net income per share - pro forma                                 $0.05
Diluted net income per share - pro forma                               $0.05


                                F-21
<PAGE>


                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
---------------------------------------------------------

Earnings (loss) per share
-------------------------

Earnings (loss) per share for each of the fiscal years ended
October 31, 2006 and 2005 was computed by dividing net income
(loss) by the weighted average number of common and common
equivalent shares outstanding and also was adjusted for the
assumed conversion of shares issuable upon the exercise of
options and warrants in accordance with SFAS No. 128, "Earnings
Per Share".  The total potential dilutive common shares excluded
from this computation due to the anti-dilution effect, totaled
599,550 and 588,227 in the fiscal years ended October 31, 2006
and 2005. Because the Company had a loss in fiscal 2006 diluted
shares were the same as basic shares since the effect of options
and warrants would have been anti-dilutive. The reconciliation
between basic and diluted average shares outstanding is as
follows:



                                              Fiscal Years Ended October 31,
                                              ------------------------------
                                                   2006            2005
                                                   ----            ----



Basic weighted average shares outstanding       4,802,835       2,807,275
Dilutive effect of stock options                       --         212,227
Dilutive effect of warrants                            --           3,760
                                                ---------       ---------
Diluted weighted average shares outstanding     4,802,835       3,023,262
                                                =========       =========


Marketing and Promotional Costs
-------------------------------

Marketing and promotional costs are expensed as incurred and
totaled approximately $256,000 and $343,000 for the  years
ended October 31, 2006 and 2005, respectively.  Such costs are
included in selling expenses in the accompanying consolidated
statements of income.

Shipping Costs
--------------

The Company classifies a majority of its shipping costs to
cost of goods sold with a lesser amount allocated to selling
expense. The allocation between cost of goods sold and selling
expense for shipping costs depends upon the nature of the
expense in terms of the work related project it is supporting.
Shipping costs allocated to selling expense totaled
approximately $88,000 and $73,000 for the years ended October
31, 2006 and 2005, respectively. Shipping costs allocated to
cost of goods sold totaled approximately $408,000 and $111,000
for the years ended October 31, 2006 and 2005, respectively




                                F-22

<PAGE>

                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
---------------------------------------------------------

Recently Issued Accounting Pronouncements
-----------------------------------------

In September 2006, the FASB issued Statement No. 157, "Fair
Value Measurements" (FASB No. 157").   FASB No. 157 defines fair
value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands
disclosures about fair value measurements. FASB No. 157 applies
under other accounting pronouncements that require or permit
fair value measurements, the Board having previously concluded
in those accounting pronouncements that fair value is the
relevant measurement attributes. Accordingly, this Statement
does not require any new fair value measurements. However, for
some entities, the application of this Statement will change
current practice.

FASB No. 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. Earlier application is
encouraged, provided that the reporting entity has not yet
issued financial statements for that fiscal year, including
financial statements for an interim period within that fiscal
year.  The Company is currently reviewing the potential effect
of this statement on its financial statements.
In September 2006, the Securities & Exchange Commission issued
Staff Accounting Bulletin 108 (SAB 108) "Considering the Effects
of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements".  SAB 108 requires that
public companies utilize a "dual-approach" to assessing the
quantitative effects of financial misstatements.  This dual
approach includes both an income statement focused assessment
and a balance sheet focused assessment.  The guidance in SAB 108
must be applied to annual financial statements for fiscal years
ending after November 15, 2006.  The Company is currently
assessing the impact of adopting SAB 108, but does not expect
that it will have a material effect on its consolidated
financial position or results of operations.

In March 2005, the FASB issued Interpretation No. 47 (FIN 47),
which clarifies terminology in FASB Statement No. 143,
Accounting for Asset Retirement Obligations.  FIN 47 clarifies
when an entity has sufficient information to reasonably estimate
the fair value of an asset retirement obligation.  FIN 47 became
effective for us in the first quarter of fiscal 2006.  The
adoption of FIN 47 did not have a material impact on the
consolidated financial statements.
In July 2006, the FASB issued Interpretation No. 48 (FIN 48),
"Accounting for Uncertainty in Income Taxes-an Interpretation of
FASB Statement 109", which clarifies the accounting for
uncertainty in tax positions. FIN 48 provides that the tax
effects from an uncertain tax position can be recognized in the
consolidated financial statements, only if the position is more
likely than not to be sustained on audit, based on the technical
merits of the position. The provisions of FIN 48 are effective
as of the beginning of fiscal 2007, with the cumulative effect
of the change in accounting principle recorded as an adjustment
to opening retained earnings. The Company is currently
evaluating the impact of adopting FIN 48 on the consolidated
financial statements.


                                F-23
<PAGE>

                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 - ACQUISITIONS
---------------------

Assessment and Evaluation Concepts, Inc.
----------------------------------------

In January 2005, the Company acquired all of the outstanding
stock of Assessment and Evaluation Concepts Inc. ("AEC") for
$122,000 consisting of $83,000 in cash and 12,000 shares of the
Company's common stock.  The value of the shares issued was
determined based on the average market price of the Company's
common stock over the two-day period before and after the date
of the acquisition.  In addition, options to purchase 50,000
shares of the Company's common stock were granted pursuant to
the 2000 Plan on the date of the closing exercisable at $3.06
per share, the fair market value on that date.  The options are
exercisable commencing one year from the closing, through
January 2015.  The operations of AEC have been included in the
consolidated financial statements since the date of acquisition.

The following table summarizes the estimated fair value of the
assets acquired at the date of acquisition:

      Accounts receivable                   $  22,930
      Goodwill                                 99,070
                                            ---------
        Total and net assets acquired        $122,000
                                            =========





























                                F-24

<PAGE>


                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 - ACQUISITIONS (continued)
---------------------

Achievement Data, Inc.
----------------------

On July 1, 2005, the Company acquired all of the outstanding
stock of Achievement Data, Inc. ("ADI").  The total
consideration paid by the Company for the ADI stock was
$1,650,000, consisting of $1,155,000 in cash, the issuance of
89,488 shares of Common Stock of the Company (valued at
approximately $331,650, based on the average of closing prices
for the Company's Common Stock for the five trading days
preceding the closing) and $163,350 in subordinated promissory
notes issued to two of the former stockholders of ADI.  The
promissory notes accrue interest at the rate of 5% per annum and
are payable through six semi-annual installments of principal
plus interest.  The operations of ADI are included in the
consolidated financial statements since the date of acquisition.


The following table summarizes the estimated fair value of the
assets acquired and liabilities assumed at the date of
acquisition:

      Current assets - other                  $   53,530
      Accounts receivable                        138,645
      Property and equipment                      73,756
      Goodwill                                 1,435,368
                                              ----------

       Total assets acquired                   1,701,299
                                              ----------
      Current liabilities                        (51,299)
                                              ----------
        Total liabilities                        (51,299)
                                              ----------
        Net assets acquired                   $1,650,000
                                              ==========

Questar Educational Systems, Inc.
---------------------------------

On May 31, 2006 the Company acquired all of the outstanding
shares of Questar. Total consideration paid by the Company was
$20,000,000 consisting of $15,000,000 in cash, the issuance of
222,222 shares of Series A-2 Preferred Stock of the Company
valued at $1,000,000 and a $4,000,000 promissory note.  The
Company has also agreed to pay additional consideration in 2010
if Questar achieves certain revenue goals during the three
fiscal years ending October 31, 2007, 2008 and 2009.  The
maximum contingent earn out payment is $12,500,000, of which up
to $10,000,000 shall be paid half in cash and half in Series A-2
Preferred Stock and $2,500,000 shall be paid, if earned, at the
election of the Company, in cash or additional shares of Series
A-2 Preferred Stock, or any combination thereof, valued at fair
market value at the time of issuance.

The Company financed the acquisition of Questar through senior
debt and a private equity investment.  The Company entered into
a loan agreement (the "Loan Agreement") with TD Banknorth, N.A.
("Banknorth"), pursuant to which the Company borrowed a term
loan in an aggregate principal amount of $9,600,000, obtained a
revolving line of credit in the amount of $4,000,000 and had
issued on its behalf a standby letter of credit in the original
stated amount of $194,750 against availability under the
revolving line of credit.  The Loan Agreement contains ongoing
financial covenants which are measured on an annual basis
beginning in Fiscal 2007.  The term loan is interest-only for
the first six months of the loan, and then is payable in fifty-
four equal monthly installments of principal and interest on a
five year amortization schedule.  The Company has entered into
an interest rate swap agreement with Banknorth pursuant to which
Banknorth is paying the Company 250 basis points over the one
month USD LIBOR BBA rate and the Company is paying Banknorth

                                F-25

<PAGE>

                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 - ACQUISITIONS (continued)
---------------------

a fixed rate of 7.95% on a value of $9,600,000 declining concurrently
with the term loan. The interest rate swap agreement expires after
thirty months on December 1, 2008. The term loan balloons on May 30,
2011.  Advances under the revolving line of credit are based on
a borrowing base of eligible accounts receivable and eligible
inventory of the Company and Questar.  The revolving line of
credit is available until April 30, 2008.  Both the term loan
and the revolving loan are secured by the assets of the Company
and by the assets of Questar.  The proceeds from the loans were
used to pay a portion of the purchase price for the shares of
Questar and closing costs for the transaction, and for working
capital.

The Company also entered into a securities purchase agreement
(the "Series A Convertible Preferred Stock Purchase Agreement")
with Camden Partners Strategic Fund III, L.P. and Camden
Partners Strategic Fund III-A, L.P. (collectively, the
"Investors"), pursuant to which the Company issued and sold to
the Investors 1,666,667 shares of its Series A-1 Convertible
Preferred Stock ("Series A-1 Preferred Stock") (valued at
$7,500,000, based on a price of $4.50 per share).  The proceeds
from the sale of stock were used to pay a portion of the
purchase price for the shares of Questar and closing costs for
the transaction, with the balance being retained by the Company
for working capital.  Two members of the Company's Board of
Directors, Donald W. Hughes and David L. Warnock are also
principals of each of the Investors.

Management allocated the purchase price of Questar to the assets
acquired with the assistance of third party independent appraisals
of all intangible assets and equipment acquired.  The Company
allocated $2,990,000 to equipment which is  astep of of 1,400,000
from its pre-acquisition book value. The Company assigned a value of
$360,000 to the non-compete covenant agreements that were signed by
the selling shareholders of Questar. The covenants will expire as of
October 31, 2009. The Company will amortize the value assigned to this
intangible asset over its expected life (41 months). Additionally, the
Company has estimated that the customer contracts acquired from
Questar are valued at $4,500,000.  This amount will be amortized
in relation to annual value of discounted cash flow the Company
expects to receive over the life of the contracts (see schedule
below). With the exception of the non-compete covenants and
customer contracts there were no other identifiable intangible
assets; therefore, the balance of the purchase price of $11,678,044
was allocated to goodwill. The Company will perform annual tests to
ascertain that the carrying value of the goodwill is not impaired.

The operations of Questar have been included in the consolidated
financial statements since the date of acquisition, June 1, 2006.

The Company has entered into employment agreements for an
initial twenty-four month term with certain members of the
management of Questar.  Such employment agreements with the
Questar management team include non-competition covenants and
proprietary rights agreements.




                                F-26

<PAGE>

                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 2 - ACQUISITIONS (continued)
---------------------

The following table summarizes the estimated fair value of the
assets acquired and liabilities assumed at the date of
acquisition:

      Other current assets, including
      cash of $1,443,772                        $   1,544,363
      Accounts receivable                           3,432,911
      Property and equipment                        2,989,530
      Non compete covenants                           359,500
      Customer contracts                            4,500,000
      Goodwill                                     11,678,044
                                                -------------
        Total assets acquired                      24,504,348
                                                -------------
      Current liabilities                          (3,477,274)
                                                -------------
        Total liabilities                          (3,477,274)
                                                -------------
        Net assets acquired                       $21,027,074
                                                =============
<TABLE>
<CAPTION>

                              Estimated
                              Fair Value        Net Book Value       Intangible
                              May 31, 2006      October 31, 2006     Asset life (months)
                              ------------      ----------------     -------------------

<S>                        <C>                 <C>                <C>
Non Compete covenants          $360,000              $316,000        41 months

Customer contracts           $4,500,000            $4,123,000        1 to 4 years
</TABLE>

A summary of the future annual amortization expense
associated with the intangible assets acquired from
Questar is as follows:

                        Non Compete     Customer
                         Covenants     Contracts        Total
                        -----------    ---------        -----

           2007          $105,000     $2,152,000     $2,257,000
           2008          $105,000       $855,000       $960,000
           2009          $105,000       $487,000       $592,000
           2010          $    --        $270,000       $270,000



The following unaudited pro forma income statement data presents
the consolidated results of operations of the Company had the
acquisitions of AEC, ADI and Questar occurred at the beginning
of the earliest period presented:




                                F-27

<PAGE>

                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 2 - ACQUISITIONS (continued)
---------------------

                                        Proforma - Unaudited
                                        Year Ended October 31,
                                        ----------------------

                                        2006             2005
                                        ----             ----

Net revenue                         $45,100,000      $37,600,000
Net income                           $1,635,000       $2,955,000
Basic earnings per share                  $.34              $.62
Diluted earnings per share                $.32              $.59

The above pro forma information does not purport to be indicative
of what would have occurred had the acquisitions been made as of
such date or the results which may occur in the future.


NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
--------------------------------------


                                                     October 31,
                                              ------------------------
                                                 2006           2005
                                                 ----           ----


      Leasehold improvements                  $ 356,706       $288,190
      Furniture, fixtures and equipment       4,390,529        876,672
                                              ---------      ---------
                                              4,747,235      1,164,862
      Less: accumulated depreciation          1,013,008        488,863
                                              ---------      ---------
                                             $3,734,227       $675,999
                                             ==========      =========

Depreciation expense for the fiscal years ended October 31, 2006
and 2005 was $524,145 and $187,866, respectively.

In connection with the acquisition of Questar the Company had an
independent third party appraisal of the tangible assets that were
purchased during the transaction.  The appraisal resulted in a
"step up" in net book basis of approximately $1,400,000 to
property and equipment. Such step up is included in the Company's
net Property and Equipment value as of October 31, 2006.


NOTE 4 - SALE-LEASEBACK; COMMITMENTS
------------------------------------

In July 2003, the Company sold its headquarters building to 26
Palmer LLC for $2,875,000.  The building and related
improvements had a net book value of $1,458,481.  The Company
reported a deferred gain on the sale totaling $1,254,383, net of
closing costs totaling $162,136 in fiscal 2003.  The building
was then leased back to the Company under a ten-year lease
agreement.  As a result of the sale/leaseback, the deferred gain
is being recognized over the term of the lease at $125,439 per
year.  Among other provisions, the lease provides for additional
rent to be paid by the Company for real estate taxes and
insurance.

                                F-28

<PAGE>

                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 4 - SALE-LEASEBACK; COMMITMENTS (continued)
------------------------------------

The Company entered into a five year lease commencing June 1,
2006 with a five-year option to renew for the Questar
Educational Systems Inc. operation in Minnesota. The Company
also has thirteen months and twelve months remaining on the
leases on the Texas and Minnesota offices, respectively. In
addition, the Company has leases on certain of its equipment.
Additionally, subsequent to the end of Fiscal 2006, the Company
entered into a short term lease commitment (February 2007 - July
2007) to occupy office space in Minnesota. The additional space
was needed in order to enable the Company to complete certain
customer project requirements during such period of time.  The
Company presently has no intention of renewing the lease after
its termination.


Future minimum rentals on these operating leases are
approximately as follows:


Year ending October 31,
-------------------------

  2007                       $   1,422,000
  2008                           1,126,000
  2009                           1,135,000
  2010                           1,146,000
  2011                             832,000
  2012 and thereafter              686,000
                             -------------

                             $   6,347,000
                             =============

Rent expense was approximately $835,000 and $382,000 for the
fiscal years ended October 31, 2006 and 2005, respectively.

NOTE 5 - REVOLVING CREDIT AGREEMENTS
------------------------------------

The Company has a $4,000,000 revolving credit agreement which
expires on April 30, 2008 if not renewed. Advances are due on
demand, are secured by substantially all the assets of the
Company, and are subject to a defined borrowing base that
shall not exceed the sum of 80% of eligible accounts
receivables and 50% of eligible inventory. The Company has
secured under the revolving credit agreement an 'Irrevocable
Letter of Credit' of $198,750 that reduces the total line
available to $3,801,250. Interest on the advances is at 2.5%
above the LIBOR and is due monthly. Advances of $1,774,819
were outstanding at October 31, 2006. The revolving credit
agreement contains ongoing financial covenants which are
measured on an annual basis beginning in October 2007. This
revolving line of credit agreement did not exist at October
31, 2005.

In Fiscal 2006, the Company secured an equipment financing line
of credit with its bank in the amount of $1,000,000 of which
none was outstanding at October 31, 2006.  The line is secured
by the equipment purchased through the line of credit.

                                F-29

<PAGE>

                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 6 - LONG-TERM DEBT
-----------------------

Long-term debt consists of the following:



                                                                 October 31,
Description               Interest Rate       Due Date        2006         2005
-----------               -------------       --------        ----         ----

Equipment loan payable
in monthly installments
of $2,295 including
interest, collateralized
by the equipment               6%               2009       $  75,469     $97,686

Equipment loan payable
in monthly installments
of $633 plus interest,
collateralized by
the equipment               Prime + 1%
                            (9.25% at
                            10/31/2006)         2008          15,200      22,800

Equipment loan payable
in monthly installments
of $1,708 including
interest, collateralized
by the equipment               6%               2010          63,002      79,126


Loan payable, interest
only for first year then
monthly installments of
$23,339                      6.25%              2011              --*  1,200,000


Loan payable, interest
only for seven months then
monthly installments of
$135,668 including
interest                        **              2011       9,600,000**        --


Unsecured loans payable
in semi-annual installments
of $29,656 including interest
to the former two
shareholders of ADI            5%               2008         111,566     163,350


Loan payable, interest
only to former Questar
shareholders                   6%               2011       4,000,000          --
                                                          ----------   ---------

Total long term debt                                      13,865,237   1,562,962

Less:  current maturities                                  1,459,502     166,750
                                                          ----------   ---------

                                                         $12,405,735  $1,396,212
                                                         ===========  ==========

*In connection with the acquisition of Questar, the Company paid
off the loan.
** The Company has entered into an interest rate swap agreement
with a rate of 2.5% above the one month USD LIBOR BBA on a value
of $9,600,000 declining concurrently with the term loan. The
interest rate swap agreement expires after thirty months on
December 1, 2008. The term loan balloons on May 30, 2011. The
note is secured by the assets of the Company. The promissory
note contains financial covenants consisting of a debt service
coverage ratio, interest coverage ratio, senior debt to EBITDA
ratio, fixed charge coverage ratio as well as certain non-
financial covenants, with compliance beginning Fiscal 2007.

                                F-30

<PAGE>

                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 6 - LONG-TERM DEBT (continued)
-----------------------

Approximate maturities of long-term debt for years subsequent to
October 31, 2006 are as follows::

Fiscal year ending October 31,
------------------------------

      2007                       $ 1,460,000
      2008                         1,848,000
      2009                         1,930,000
      2010                         2,048,000
      2011                         6,580,000
                                 -----------
                                 $13,865,000
                                 ===========


NOTE 7 - SUBORDINATED DEBENTURE AGREEMENT
-----------------------------------------

In connection with the Company's October 1998 subordinated
debenture agreement there were warrants outstanding to purchase
138,047 shares of the Company's common stock.  In December 2004,
the warrants to purchase 138,047 shares of the Company's common
stock were exercised for $155,303.


NOTE 8 - EMPLOYEE BENEFIT PLANS
-------------------------------

The Company has a qualified 401(k) Profit Sharing Plan, as
amended, under which eligible employees who are eighteen years of
age and have completed either twelve months, or one thousand
hours, of employment become participants.  The Plan provides a
matching component under the 401(k) Profit Sharing Plan of up to
five percent (5%) of each eligible employee's compensation.

The Company has a Money Purchase Pension Plan, as amended, under
which eligible employees who are eighteen years of age and have
completed either twelve months, or one thousand hours, of
employment become participants.  The Plan excludes highly
compensated employees, as defined, and provides for annual
contributions of five percent (5%) of each eligible employee's
compensation.

In connection with the acquisition of Questar in Fiscal 2006,
the Company assumed the existing employee's retirement plan.
Questar has a qualified 401(k) Profit Sharing Plan. The Plan
allows for annual employee contributions of up to 25% of
eligible salary. Eligibility requirements are a minimum of 18
years of age with at least six months of service with the
Company. The Company matches 100 percent of the first $250 of
each employee's contributions, then 50 percent of contributions
thereafter up to a maximum of $2,500 or 2.5 percent of employee
earnings, whichever is reached first.

For the fiscal years ended October 31, 2006 and 2005, retirement
plan costs totaled approximately $369,000 and $263,000,
respectively.

                                F-31

<PAGE>

                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 9 - STOCKHOLDERS' EQUITY
-----------------------------

Preferred Stock
---------------

The Company is authorized to issue 5,000,000 shares of $.0001
par value preferred stock. The stock may be issued by the Board
of Directors of the Company in one or more series and with such
preferences, conversion or other rights, voting powers and other
provisions as may be fixed by the Board of Directors in the
resolution authorizing their issuance without any further action
of the stockholders.

As part the Questar acquisition (Note 2), the Company issued
222,222 of the Series A-2 preferred shares.  In addition, as
part of the related financing of the Questar acquisition, the
Company entered into a securities purchase agreement for the
sale of 1,666,667 shares of the Series A-1 preferred stock.  At
October 31, 2006 and 2005, there were 1,888,888 and zero shares
of preferred shares outstanding, respectively.

There is no trading market for the Company's Series A-1
Preferred Stock or Series A-2 Preferred Stock, and the Company
has no intention of applying to list shares of its Preferred
Stock.  The Company has agreed to use its best efforts to file a
registration statement under the Act with respect to the shares
of Common Stock underlying the Series A-1 Preferred Stock, upon
request of the Investors, at any time following one year after
the issuance date of the Series A-1 Preferred Stock, in
accordance with the Investor Rights Agreement.  With respect to
the 222,222 shares of Series A-2 Preferred Stock issued as part
payment of the purchase price at closing, the Company has agreed
to use it best efforts to include such shares of Common Stock
underlying the Series A-2 Preferred Stock in a registration
statement if, and when, filed by the Company, upon request of
the Investors, at any time following one year after the issuance
date of the Series A-1 Preferred Stock.  With respect to the
escrowed shares, the Company has agreed to use its best efforts
to file a registration statement under the Act for the shares of
Common Stock into which the Series A-2 Preferred Stock will be
convertible, upon request of the former shareholders of Questar
following the release, if any, of the escrowed shares, or to
include such shares of Common Stock in a registration statement
if, and when, filed by the Company with respect to the shares of
Common Stock beneficially owned by the Investors.

Initially, the shares of Series A-1 Preferred Stock and the
Series A-2 Preferred Sock are convertible into shares of Common
Stock on a one-for-one basis.  The conversion rate is subject to
anti-dilution adjustments set forth in the Certificate of
Designations for the Series A Preferred Stock.  For the first
three years after the issuance, neither Series A-1 Preferred
Stock nor Series A-2 Preferred Stock will accrue dividends.
Thereafter, dividends will accrue at the rate of 8% per annum,
payable in cash or additional shares of Series A Preferred
Stock, at the election of the Company; provided, however, that
no shares of Series A-2 Preferred Stock will accrue any
dividends until, and after the time when, the Series A-2
Preferred Stock is released to the selling shareholders of

Questar in accordance with the Escrow Agreement.
Each share of Series A-1 Preferred Stock is entitled to cast one
vote per each share of Common Stock into which such share of
Series A-1 Preferred Stock is convertible as of the record date
for a stockholder vote.  Each share of Series A-2 Preferred
Stock that has been issued to the selling shareholders of
Questar on the closing date is entitled to cast one vote per
each share of Common Stock into which such share of Series A-2
Preferred Stock is convertible as of the record date for a
stockholder vote.  The shares of Series A-2 Preferred Stock that
are held in escrow pending release if the earn out hurdles are
satisfied, will not be entitled to vote so long as such shares
remain in escrow.  The shares of Series A-1 Preferred Stock and
Series A-2 Preferred Stock which are entitled to vote shall vote
together with the Common Stock as a single class.

                                F-32

<PAGE>

                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 9 - STOCKHOLDERS' EQUITY (continued)
-----------------------------

Warrants Issued for Services
----------------------------

In connection with the purchase of Questar, the Company issued to
Signal Hill Capital Group, LLC, who represented the Company as
its investment banker in connection with the Questar
acquisition, warrants to purchase up to 50,000 shares of Common
Stock of the Company, at an exercise price of $4.50 per share.
The warrants are fully exercisable and have a five-year term.
The estimated fair value cost of such warrants based on the
Black Scholes pricing model is $112,072.

Amended and Restated 1991 Stock Option Incentive Plan
-----------------------------------------------------

The Company adopted an Amended and Restated 1991 Stock Option
Incentive Plan (the "1991 Plan") whereby options to purchase up to
an aggregate of 625,000 shares of common stock, may be granted to
officers, key employees, directors, and consultants of the
Company. Subject to the terms of the 1991 Plan, the Board of
Directors is authorized to select optionees and determine the
number of shares covered by each option, its exercise price and
certain of its other terms.  No one participant may receive an
award in excess of 50,000 shares in any one fiscal year.  All
options are 100% vested after twelve months and may be exercised
for a nine-year period commencing one year from the date of the
grant.  The exercise price of an option granted under the Plan may
not be less than the fair market value of the Company's common
stock on the date of the grant.

<TABLE>
<CAPTION>
1991 Plan Weighted Average Life and Price as of October 31, 2006:

                    ------Options Outstanding-----                     ----Options Exercisable-------

                                     --------Weighted avg.------                     Weighted avg
Range of                             Remaining Life     Exercise       # of          Exercise
Exercise Prices       # of Shares       (months)        Price          Shares        Price
---------------       -----------    --------------     --------       ------        --------
<S>               <C>              <C>               <C>           <C>           <C>

$1.67 - $2.88          207,553           18             $2.49          207,553        $2.49
$3.00 - $4.25           49,000           17             $4.18           49,000        $4.18
                       -------           --             -----          -------        -----
     Totals            256,553           22.6           $2.82          256,553        $2.82
                       -------           ----           -----          -------        -----
</TABLE>





                                F-33

<PAGE>

                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 9 - STOCKHOLDERS' EQUITY (Continued)
-----------------------------

<TABLE>
<CAPTION>

1991 Plan activity is summarized as follows:


                                                                              Weighted
                                                          Option              Avg. Price
                                               Shares     Price Per Share     Exercise
                                               ------     ---------------     ----------

<S>                                        <C>         <C>                  <C>
Options outstanding - October 31, 2004        411,788     $1.668 - $6.125      $2.99
  Granted                                          --            --             --
  Canceled                                    (47,500)    $2.125 - $6.125      $2.76
  Exercised                                        --
                                              -------


Options outstanding - October 31, 2005        364,288     $1.668 - $4.375      $3.02
  Granted                                          --            --
  Canceled                                    (48,525)    $1.668 - $4.375      $4.28
  Exercised                                   (59,210)    $2.876 - $3.00       $2.88
                                              -------


Options outstanding - October 31, 2006        256,553     $1.668 - 10.50       $4.252
                                              =======
Options exercisable - October 31, 2006        256,553     $1.668 - 10.50       $4.252
                                              =======
</TABLE>



2000 Stock Incentive Plan
-------------------------

In February of Fiscal 2000, the Company adopted the 2000 Stock
Incentive Plan (the "2000 Plan") which supersedes the 1991 Plan.
Options outstanding under the 1991 Plan at October 31, 2000 will
remain effective until forfeited, cancelled, or expired without
exercise. The 2000 Plan calls for options to purchase up to an
aggregate of an additional 300,000 shares of the Company's
common stock plus such additional shares as becomes available
under the 1991 Plan by reason of forfeiture of awards granted
there under or cancellation or expiration of such shares without
exercise, and may be granted to officers, key employees,
directors, and consultants of the Company.  At the Annual
Meeting of Stockholders held on April 29, 2005, the stockholders
approved an amendment to the 2000 Plan increasing by 200,000 the
number of shares eligible to be issued pursuant to the 2000
Plan.  Subject to the terms of the 2000 Plan, the Board of
Directors is authorized to select optionees and determine the
number of shares covered by each option, its exercise price and
certain of its other terms.  No one participant may receive an
award in excess of 150,000 shares in any three fiscal-year
period.  Prior to Fiscal 2006, all options were 100% vested
after twelve months and may be exercised for a nine-year period
commencing one year from the date of grant.  Effective for
options granted under the 2000 Plan in Fiscal 2006 and
thereafter, such options will become exercisable in three equal
annual installments following the grant date.  The exercise
price of an option granted under the 2000 Plan may not be less
than the fair market value of the Company's common stock on the
date of grant.


                                F-34

<PAGE>

                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 9 - STOCKHOLDERS' EQUITY (Continued)
-----------------------------

<TABLE>
<CAPTION>

2000 Plan Weighted Average Life and Price as of October 31, 2006:

                    ------Options Outstanding-----                     ----Options Exercisable-------

                                     --------Weighted avg.------                     Weighted avg
Range of                             Remaining Life     Exercise       # of          Exercise
Exercise Prices       # of Shares       (months)        Price          Shares        Price
---------------       -----------    --------------     --------       ------        --------
<S>                <C>             <C>               <C>            <C>          <C>
$0.46 - $2.10           111,300            78           $1.35          111,300       $1.35
$2.85 - $4.50           352,000           108           $3.76          209,500       $3.32
                        -------           ---           -----          -------       -----
     Totals             463,300           101           $3.18          320,800       $2.64
                        -------           ---           -----          -------       -----
</TABLE>

<TABLE>
<CAPTION>
                                                                              Weighted
                                                          Option              Avg. Price
                                               Shares     Price Per Share     Exercise
                                               ------     ---------------     ----------
<S>                                         <C>        <C>                <C>
Options outstanding - October 31, 2004         169,300    $0.46 - $2.10       $1.19

  Granted                                      216,000    $3.06 - $3.785      $3.32
  Canceled                                      (6,000)   $2.10               $2.10
  Exercised                                     (4,000)   $0.46 - $2.10       $.066
                                               -------

Options outstanding - October 31, 2005         334,300    $0.46 - $3.785      $2.62

  Granted                                      142,500    $2.85 - $4.50       $4.41
  Canceled                                      (2,500)       $3.15           $3.15
  Exercised                                    (11,000)   $0.65 - $3.15       $1.95
                                               -------

Options outstanding - October 31, 2006         463,300    $0.46 - $4.50       $3.18
                                               =======
Options exercisable - October 31, 2006         320,800    $0.46 - $3.785      $2.64
                                               =======
</TABLE>

                                F-35

<PAGE>

                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 9 - STOCKHOLDERS' EQUITY (Continued)
-----------------------------

Directors Stock Option Plan
---------------------------

In 1996, the Company adopted a Directors Stock Option Plan (the
"DSO Plan") whereby options may be granted to purchase up to an
aggregate of 25,000 shares of the Company's common stock to
directors of the Company who are not officers or employees of the
Company or otherwise eligible to receive awards under the 1991
Plan.  Pursuant to the DSO Plan, eligible directors would receive
an option to purchase 1,250 shares of the Company's common stock
on the date the director first becomes eligible.  The eligible
director would subsequently receive an option to purchase 625
shares of the Company's common stock on the date
of each succeeding annual meeting of the stockholders, unless the
director's term ends on or before that date.  Each option granted
is exercisable at the fair market value of the Company's common
stock on the date granted, and for options granted prior to Fiscal
2006, may be exercised for a nine-year period commencing one year
from the date of the grant.  Effective for options granted under
the Directors Plan in Fiscal 2006 and thereafter, such options
will become exercisable in three equal annual installments
following the grant date.

In February 2000, the Company adopted an amendment to the DSO Plan
increasing the number of options, which may be granted under the
DSO Plan, to an aggregate of 75,000 shares.  The amendment also
increased the number of shares of the Company's common stock to be
subject to the automatic grants made to directors from 1,250
shares to 5,000 shares upon first being elected to the Board of
Directors of the Company and 625 shares to 2,500 shares upon each
re-election to the Board of Directors.  At the Annual Meeting of
Stockholders held on April 29, 2005, the stockholders approved
amendments to the Directors Plan to increase by 75,000 the
number of shares eligible to be issued pursuant to the Directors
Plan and to extend the expiration date of the Directors Plan
from March 2006 to April 30, 2010.

<TABLE>
<CAPTION>
Directors' Plan Weighted Average Life and Price as of October 31, 2006:

                    ------Options Outstanding-----                     ----Options Exercisable-------

                                     --------Weighted avg.------                     Weighted avg
Range of                             Remaining Life     Exercise       # of          Exercise
Exercise Prices       # of Shares       (months)        Price          Shares        Price
---------------       -----------    --------------     --------       ------        --------
<S>                <C>            <C>               <C>             <C>           <C>
$0.62 - $2.00            31,250            60           $0.94          31,250        $0.94
$2.88 -  $4.25           47,500            92           $3.22          35,000        $3.32
                         ------            --           -----          ------
      Totals             78,750            79           $2.32          66,250        $2.20
                         ======            ==           =====          ======        =====
</TABLE>





                                F-36

<PAGE>



                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 9 - STOCKHOLDERS' EQUITY (Continued)
-----------------------------

Directors' stock option plan activity is summarized as follows:

<TABLE>
<CAPTION>
                                                          Option              Avg. Price
                                               Shares     Price Per Share     Exercise
                                               ------     ---------------     ----------

<S>                                        <C>        <C>                  <C>
Options outstanding - October 31, 2004         57,500     $0.62 - $7.85        $2.04

  Granted                                      12,500         $3.20            $3.20
  Canceled                                         --           --               --
  Exercised                                   ( 2,500)        $0.70            $.070
                                              -------

Options outstanding - October 31, 2005         67,500     $0.62 - $7.85        $2.31
                                              =======
  Granted                                      12,500         $2.96            $2.96
  Canceled                                     (1,250)        $7.85            $7.85
  Exercised                                        --           --               --


Options outstanding - October 31, 2006         78,750     $0.62 - $4.25        $2.32
                                               ======
Options exercisable - October 31, 2006         66,250     $0.62 - $4.25        $2.20
                                               ======
</TABLE>


                                F-37

<PAGE>

                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 9 - STOCKHOLDERS' EQUITY (Continued)
-----------------------------

Consultants Stock Incentive Plan
--------------------------------

In 1997, the Company adopted a Consultants Stock Incentive Plan
(the "CSI Plan") whereby options to purchase up to 50,000 shares
of the Company's common stock may be granted to consultants or
advisors of the Company.  Subject to the terms of the CSI Plan, a
committee of the Board of Directors is authorized to select
participants and determine the number of shares covered by each
option, its exercise price and other terms.  The exercise price,
however, may not be less than the fair market value of the
Company's common stock on the date of the grant.  CSI Plan
activity is as follows:


                                           Shares       Option Price Per Share
                                           ------       ----------------------

Options outstanding - October 31,
 2006, 2005 and 2004                       7,500                  $.90
                                           =====
Options exercisable - October 31,
 2006                                      7,500                  $.90
                                           =====



NOTE 10 - INCOME TAXES
----------------------

Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes using the enacted tax rates in
effect in the years in which the differences are expected to
reverse.  Deferred income tax assets and liabilities are
comprised as follows:


                                                      October 31,
                                                      -----------
                                               2006                2005
                                               ----                ----
Deferred tax assets:
  Net operating loss                        $760,901            $584,723
  Sale/leaseback of building                 342,865             394,295
  Asset impairment                           250,338                   0
  Salaries                                    81,186              44,934
  Rent                                        47,170              38,164
  Unused employee vacation                   228,054             103,946
  Other                                      196,837              44,302
                                           ---------           ---------

  Gross deferred tax assets                1,907,351           1,210,364
                                           ---------           ---------

Deferred tax liabilities:

  Goodwill                                  (217,941)            (36,102)
  Test passage bank and
    test development                               0              (6,222)
                                           ---------           ---------
  Gross deferred tax
    liabilities                             (217,941)            (42,324)
                                           ---------           ---------

Net deferred tax assets                   $1,689,410          $1,168,040
                                          ==========          ==========

                                F-38

<PAGE>

                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 10 - INCOME TAXES (Continued)
----------------------

The deferred tax assets and liabilities include the following
amounts:




                                               Fiscal Year Ended October 31,
                                               -----------------------------
                                                  2006              2005
                                                  ----              ----
      Current deferred tax assets               $364,031         $571,417

      Noncurrent deferred tax assets          $1,543,320         $638,947
                                              ----------         --------
      Noncurrent deferred tax liabilities       (217,941)         (42,324)
                                              ----------         --------
      Net noncurrent deferred tax assets      $1,325,379         $596,623
                                              ==========         ========


The Company believes it is more likely than not that this net
deferred tax asset will be realized in future periods and,
accordingly, no valuation allowance has been recorded.

The Company's income tax expense (benefit) consists of the
following:



                                               Fiscal Year Ended October 31,
                                               -----------------------------
                                                  2006              2005
                                                  ----              ----
      Current:
        Federal                                 $ 12,938          $    --
        State                                    259,640           44,050
                                                --------          -------

                                                 272,578           44,050
                                                --------          -------

      Deferred:
        Federal                                 (432,356)         195,089

        State                                    (89,014)          56,639
                                                --------          -------


                                                (521,370)         251,728
                                                --------          -------



      Income tax provision (benefit)           $(248,792)        $295,778
                                               =========         ========



                                F-39

<PAGE>







                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 10 - INCOME TAXES (Continued)
----------------------


A reconciliation of the difference between the expected income tax
rate using the statutory Federal tax rate and the Company's
effective rate is as follows:


                                               Fiscal Years Ended October 31,
                                               ------------------------------
                                                  2006              2005
                                                  ----              ----



U.S. Federal income tax statutory rate           (34%)              34%

State income tax, net of Federal income
  tax effect                                      15                 5

Other, net                                         1                 3
                                                 ---                --

*Effective tax (benefit) rate                    (18)%              42%
                                                 ===                ==
* The Company during Fiscal 2006 incurred a pre-tax loss of
$1,373,637 resulting in a tax benefit (refund).   The effective
tax rate (benefit) in Fiscal 2006, as a percentage of the pre-tax
loss, was partially offset by a change in estimate of prior year
income taxes of approximately $84,000 that was charged to the
current year Fiscal 2006 income tax expense.


                                F-40

<PAGE>
                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 11 - EMPLOYMENT AGREEMENTS
-------------------------------

The Company has employment agreements with several of its key
employees.  The agreements are for varying terms generally ranging
from one to three years and are automatically extended each year
unless the Company notifies the employee, in writing, ranging from
at least 60 to 180 days prior to the anniversary date that the
agreement will not be extended.

Each agreement calls for a base salary, which may be adjusted
annually at the discretion of the Company's Board of Directors,
and also provides for eligibility in the Company's benefit plans
and incentive bonuses which are payable based upon the attainment
of certain profitability goals.  Among other provisions, the
agreements include a non-compete clause for varying periods not
exceeding three years following termination of employment.

The Company entered in two -year employment agreements with the
two officers of AEC. Pursuant to the agreements, the officers of
AEC are entitled to a base salary and bonuses determined by the
attainment of certain performance goals. In addition, an
aggregate of 50,000 options to purchase shares of the Company's
Common Stock were granted pursuant to the 2000 Stock Incentive
Plan at $3.06 per share.

The Company entered into employment agreements for an initial
forty-month term with two of the former shareholders of ADI.
In addition, the former shareholders of ADI who are continuing
with ADI were granted, pursuant to the 2000 Plan, an aggregate
of 60,000 ten-year options to purchase additional shares of
the Company's Common Stock, at an exercise price of $3.75 per
share, subject to vesting upon the completion of one year of
employment.  The Company also entered into an employment
agreement for an initial twenty-eight month term with a key
employee of ADI.

The Company has entered into employment agreements for an
initial twenty-four month term with certain members of the
management of Questar.  Such employment agreements with the
Questar management team include non-competition covenants and
proprietary rights agreements.

The aggregate commitment for future salaries under the
employment agreements as of October 31, 2006, excluding bonuses
and benefits, is approximately as follows:

Fiscal year ending October 31,
------------------------------
      2006                           $2,731,000
      2007                           $1,726,000
      2008                             $207,000


NOTE 12 - RELATED PARTY TRANSACTIONS
------------------------------------

Cahill Warnock Transactions.  In November 1998, the Company
----------------------------
issued and sold to the Cahill, Warnock Entities 8% Debentures
due 2003 (the "Debentures"), in the aggregate principal amount
of $4,000,000, and as additional consideration for purchasing
the Debentures, Warrants to acquire shares of the Company's
Common Stock, which, on the closing date of such transaction,
constituted 20% of the Company's issued and outstanding common
stock on a fully diluted basis.  The Debentures were repaid in
Fiscal 2003, and a portion of the Warrants held by the Cahill,
Warnock Entities expired at the end of Fiscal 2003. The Cahill
Warnock Entities exercised its remaining 138,047 warrants
outstanding in December 2004 (after the end of Fiscal 2004),
resulting in additional paid-in capital to the Company of
$155,303.  As of the date of this Report, the Cahill Warnock
Entities beneficially own 20.8% of the Company's outstanding
Common Stock, fully-diluted.

                                F-41

<PAGE>
                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 12 - RELATED PARTY TRANSACTIONS (continued)
------------------------------------

Pursuant to an investor rights agreement between the Company and
the Cahill, Warnock Entities, the Company has agreed that so
long as the Cahill, Warnock Entities own at least 50% of the
shares issued upon exercise of such Warrants, the Cahill,
Warnock Entities shall have the right to nominate two directors
to the Board of Directors of the Company.  David L. Warnock and
Donald W. Hughes are the current directors who were nominated by
the Cahill, Warnock Entities.  Pursuant to the Investor Rights
Agreement, the directors and executive officers have agreed, at
each meeting of stockholders for the purpose of electing
directors, to cast their eligible votes in favor of the nominees
of the Cahill, Warnock Entities.

Acquisition of AEC.  Pursuant to the acquisition of AEC in
January 2005, the Company issued 12,000 shares of the Company's
Common Stock to the former stockholders of AEC in a transaction
not involving a public offering pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act.

Acquisition of ADI.  Pursuant to the acquisition of ADI in July
-------------------
2005, the Company issued 89,488 shares of the Company's Common
Stock to the former stockholders of ADI who had elected to
receive shares, in whole or in part in lieu of cash, in a
transaction not involving a public offering pursuant to the
exemption from registration provided by Section 4(2) of the
Securities Act. Martin Borg, currently the President of ADI,
received 68,119 of such shares and options to acquire 40,000
shares of Common Stock, and entered into an employment agreement
with the Company.

Camden Entities Transactions.  In connection with the
----------------------------
acquisition of Questar, the Company entered into a securities
purchase agreement the with Camden Entities, pursuant to which
the Company issued and sold to the Investors 1,666,667 shares of
its Series A-1 Preferred Stock (valued at $7,500,000, based on a
price of $4.50 per share). The proceeds from the sale of stock
were used to pay a portion of the purchase price for the shares
of Questar and closing costs for the transaction, with the
balance being retained by the Company for working capital.  The
transaction did not involve a public offering pursuant to the
exemption from registration provided by Section 4(2) of the Act.

Camden Partners Strategic Fund III, L.P. ("Camden III") is a
Delaware limited partnership formed in 2004.  It is a private
equity fund that invests in emerging micro-cap public and late
stage private companies, focusing on companies in the business
and financial services, education, and healthcare industries.
Camden III is managed by its general partner, Camden Partners
Strategic III, LLC which, in turn, is managed by its managing
member, Camden Partners Strategic Manager, LLC.  David Warnock
and Donald Hughes, who are directors of the Company, are each
managing members of Camden Partners Strategic Manager, LLC.

Camden Partners Strategic Fund III-A, L.P. ("Camden III-A") is a
Delaware limited partnership formed in 2004.  It is a private
equity fund that invests in parallel with Camden III.  Camden
III-A is managed by its general partner, Camden Partners
Strategic III, LLC, which in turn is managed by its managing
member, Camden Partners Strategic Manager, LLC.  David Warnock
and Donald Hughes, who are directors of the Company, are each
managing members of Camden Partners Strategic Manager, LLC.

Cahill, Warnock Strategic Partners Fund, L.P. ("CW") and
Strategic Associates, L.P. ("SA") are stockholders of the
Company and affiliates of Camden III and Camden III-A.  David
Warnock and Donald Hughes, who are directors of the Company, are
each managers of Camden Partners Strategic Manager, LLC and
general partners of the general partner of CW and SA.  Mr.
Warnock is President and Mr. Hughes is Executive Vice President
of Camden Partners Holdings, LLC, which serves as a manager and
advisor to Camden III, Camden III-A, CW and SA.

                                F-42

<PAGE>
                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 12 - RELATED PARTY TRANSACTIONS (continued)
------------------------------------

As of the date of this Report, the Camden Entities beneficially
own 36.9% of the Company's Common Stock on a fully-diluted
basis.  The entities controlled by Messrs. Warnock and Hughes -
the Cahill Warnock Entities and the Camden Entities -
beneficially own an aggregate of 46.9% of the Company's Common
Stock on a fully diluted basis.

Acquisition of Questar.  In the acquisition of Questar, the
-----------------------
Company issued to the selling shareholders of Questar, 222,222
shares of Series A-2 Preferred Stock (valued at $4.50 per
share), as part payment of the purchase price at closing and (b)
delivered to the escrow agent, 1,111,111 shares of the Series A-
2 Preferred Stock (valued at $4.50 per share), which will be
deemed earned by, and will be released to, the former
shareholders of Questar if revenue goals over the earn out
period of the three fiscal years ending October 31, 2007, 2008
and 2009, are met.  Such escrowed shares are not deemed to be
outstanding (and therefore, are not eligible to vote) until the
revenues goals are met and the shares are released from escrow.
The issuance and sale of the Series A-2 Preferred Stock did not
involve a public offering pursuant to the exemption from
registration provided by Section 4(2) of the Act.  The Company
issued 222,222 shares of the Company's Series A-2 Preferred
Stock to the former shareholders of Questar who had elected to
receive shares, in whole or in part in lieu of cash, in a
transaction not involving a public offering pursuant to the
exemption from registration provided by Section 4(2) of the
Securities Act.

In consideration for his sale of shares of Questar, Mr. Naegeli
(who has since been elected a director of the Company), as a
selling shareholder, received 43,488 shares of Series A-2 Preferred
Stock, which are convertible into 43,488 shares of Common Stock of
the Company, subject to anti-dilution adjustments. Mr. Naegeli is
also a shareholder in Questar Data Systems ("QDS"). In connection
with the acquisition of Questar, the Company purchased, on a
contractual basis monthly, services from QDS for certain
accounting and administrative functions. The monthly fee for
these services was $15,500 beginning in June 2006. Total fees
paid in Fiscal 2006 to QDS were $77,500.  The contract for
services with QDS concluded in December 2006 with no further
obligations due from the Company.

As part of the acquisition of Questar, the Company entered in
two separate lease agreements with the former shareholders of
Questar. Through one lease agreement, the Company rents
approximately 49,000 square-feet of office space in Apple
Valley, Minnesota. The initial term of this lease is for five
years concluding on May 31 2011 with the Company holding an
option to renew for an additional five-year period.  Pursuant
to the second lease agreement the Company uses 45,000 square-
foot of distribution center also in Apple Valley, Minnesota.
This lease also concludes on May 31 2011 with the Company
holding an option to renew for an additional five-year period.
The Company also holds an option to lease an additional 11,000
square feet of distribution center space that is adjacent to the
current distribution center.

Future minimum lease payments for the Apple Valley facilities
for the years ending October
31 are as follows:

        2007                           $780,000
        2008                            780,000
        2009                            780,000
        2010                            780,000
        Thereafter                      455,000
                                     ----------
        Total                        $3,575,000

                                F-43

<PAGE>
                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 12 - RELATED PARTY TRANSACTIONS (continued)
------------------------------------

      Legal Fees.  One of the Company's directors, Steven R.
      ----------
Berger, is a shareholder in Vedder, Price, Kaufman & Kammholz,
P.C.  The Company has retained Vedder, Price, Kaufman &
Kammholz, P.C. as its special securities counsel, and the
Company paid an aggregate of $238,237 and $177,273 in legal fees
and expense in Fiscal 2006 and Fiscal 2005, respectively.









                                F-44

<PAGE>


                            SIGNATURES

      In accordance with Section 13 or 15(d) of the Exchange Act,
the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.


                         TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.

March 13, 2007           By:/s/ ANDREW L. SIMON
                            --------------------
                            Andrew L. Simon
                            President and Chief Executive Officer

March 13, 2007           By:/s/ JAMES J. WILLIAMS
                            ---------------------
                            JAMES J. WILLIAMS
                            CHIEF FINANCIAL OFFICER


        In accordance with the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.


     Signature                        Title                   Date
     ---------                        -----                   ----

/s/ ANDREW L. SIMON            Director and Chairman       March 13, 2007
-------------------------
    Andrew L. Simon                of the Board

/s/ MICHAEL D. BECK                  Director              March 13, 2007
-------------------------
    Michael D. Beck

/s/ STEVEN R. BERGER                 Director              March 13, 2007
-------------------------
    Steven R. Berger

/s/ DONALD W. HUGHES                 Director              March 13, 2007
-------------------------
    Donald W. Hughes

/s/ CHRIS L. NGUYEN                  Director              March 13, 2007
-------------------------
    Chris L. Nguyen

/s/ LINDA G. STRALEY                 Director              March 13, 2007
-------------------------
    Linda G. Straley

/s/THOMAS STRUZZIERI                 Director              March 13, 2007
-------------------------
   Thomas Struzzieri

/s/ DAVID L. WARNOCK                 Director              March 13, 2007
-------------------------
    David L. Warnock

/s/ THEODORE NAEGELI                 Director              March 13, 2007
-------------------------
    Theodore Naegeli